stratechery
stratechery

Ello and Consumer Friendly Business Models

Vox introduced Ello this way:

A brand-new social networking startup — Ello — has gone viral. At one point on Thursday, the site was acquiring 31,000 new users an hour — many of whom flocked to there because of a disagreement with Facebook over its policy requiring real names, which some say is unfair to LGBTQ and transgender users.

Ello might be the new Facebook or the new Twitter or the new social media flop. It’s too early to tell.

Actually, no, it’s not too early. Ello will fail, deservedly so. It has a consumer hostile business model.


Discussion of how a company makes money – its business model – is often completely divorced from discussion about the product at hand, but I think that’s a mistake; business models fundamentally impact product, if not now, then assuredly in the future. To their credit, Ello is quite up-front about the fact that many of their decisions are driven by business models, specifically, their opposition to ads. From their WTF document:

Many other social networks (like Twitter, Facebook, Tumblr, Google+, Instagram, etc. etc.) started out ad-free, then suddenly switched gears. They modified their privacy policies, started selling information about their users to data brokers, and bombarded us with ads. Many users of those networks feel betrayed.

Ello’s entire structure is based around a no-ad and no data-mining policy. Quite frankly, were we to break this commitment, we would lose most of the Ello community. Including ourselves, because we dislike ads more than almost anyone else out there. Which is why we built Ello in the first place.

OK, so how exactly will Ello make money?

Very soon we will begin offering special features to our users. If we create a special feature that you like, you can choose to pay a very small amount of money to add it to your Ello account forever. We believe that everyone is unique and that we all want and need different things from a social network. So, we are going to offer all sorts of ways for users to customize their Ello experience.

I have no idea what these features might be – a mobile app and an API would be good places to start – but the gist is clear: to get the optimal Ello experience you had better pay up, but only once, and you’ll have it forever.

This is a terrible idea.

Here’s how this policy will play out in practice:

  • The initial experience of using Ello will be a poor one because you won’t have access to all of the features
  • A poor initial experience will lead to high rates of abandonment among the few friends you manage to convince to try the service
  • You will complain to Ello and they will have exactly zero incentive to make things better

It’s this final point that is critical for me whenever I evaluate a new product or service: does the product’s business model incentivise the developer to be responsive to my needs as a user?

The way this drives my decision-making in hardware is the easiest to understand:

  • Businesses predicated on selling high margin products are highly incentivized to differentiate their products to attract my purchase, and also highly incentivized to ensure quality to guarantee that I stay loyal
  • Businesses predicated on achieving the lowest prices are highly incentivized to drive down costs, and are much more likely to sacrifice quality

Ergo, I almost always buy high margin products. The incentives are better for me as a customer, according to the criteria that I consider important.

Things are a little more complex when it comes to software, but the same guiding principle is still in place: I like companies that are incentivized to make and keep me happy:

  • My favorite business model is a subscription: I pay every month for a piece of software or a service, which means the software or service provider is always under pressure to earn my money

  • Advertising is actually not far off from a subscription-style service: while in a very narrow view the adage “you’re the product that’s being bought and sold” is certainly true, the reality is that the Google and Facebooks of the world are arguably even more incentivized to make sure the user experience is great. After all, the value they offer has to be sufficient to overcome the negative effects of advertising (and in some case, particularly Google search, there are times when advertising is actually additive to the user experience)

  • Up-front payments can go either way:

    • I’m a fan of up-front payments if the developer has plans to release new versions of the software that require me to pay to upgrade. This sort of business is similar to high-margin hardware: not only must this developer offer something very compelling to earn my up-front payment, they must also deliver something of quality to ensure I’m willing to pay for versions two, three, and four
    • On the other hand, if the developer will never charge for upgrades, then I think this business model isn’t consumer friendly at all. A developer of such an app is incentivized to garner as many up-front payments as possible with no regard for existing customers
  • “Unlock”-type schemes are the worse. These can be products where you need to pay for features or assistance to accomplish some given task (free-to-play definitely falls in this category). Developers who use these schemes are incentivized to make the experience of their product frustrating so that I might be willing to pay to avoid the frustration. But, once I pay, there is no incentive to keep me happy

That said, my business model preference is impacted by the type of product that is being offered. For example, while I particularly like subscriptions for productivity-focused products that I use on a regular basis, games are more singular experiences that I take in at a particular moment in time; in that case I like paid downloads that let me experience the game on my own schedule. When it comes to social networks, on the other hand, advertising is clearly the best option: after all, a social network is only as good as the number of friends that are on it, and the best way to get my friends on board is to offer a kick-ass product for free. In other words, the exact opposite of the feature-limited product that Ello is proposing.

Make no mistake: I am very much aware that Facebook is tracking everything I do – and that it’s getting worse. As I wrote on Monday in my Daily Update (members-only), the killer feature of the just-relaunched Atlas is not buying ads outside of Facebook. Rather:

What Facebook is proposing with Atlas is that advertisers can connect the dots between online advertising – on Facebook or off – to actual purchases made by customers no matter where those purchases are made. This means that ads served through Atlas will, in the long run, be much more effective for marketers, even as Facebook improves their targeting which will allow them to command ever higher rates across all of their ad offerings.

Not only is that a marketer’s dream, it’s also profoundly creepy.

Here’s the thing though: the reason Facebook can pull that off is because companies like Datalogix, Epsilon, Acxiom, and Bluekai – all Facebook partners since 2013 – have been tracking what I do and buy for years. Privacy died a long time ago; pretending like Facebook killed it is naive (just ask Richard Stallman). If you truly care about privacy then don’t use the Internet, credit cards, a mobile phone, the list goes on-and-on.

If, on the other hand, you care about making a successful social network that users will find useful over the long run, then actually build something that is as good as you can possibly make it and incentivize yourself to earn and keep as many users as possible.

As for Ello, well, co-founder Paul Budnitz told Mashable:

“The advertisers are the customer and the user is the product that’s being bought and sold,” he told Mashable. “We don’t see ourselves competing with [Facebook], because what we’re doing feels so different.”

I completely agree; it feels like a political statement not a product that I – and more importantly, none of my friends – would want to use, and I’m pretty certain that Mark Zuckerberg doesn’t see them as competition either.

Podcast: Exponent Episode 019 – Me, Myself, and Minecraft

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

In this week’s episode Ben and James reflect about last week’s episode and the personal feedback that resulted, then move on to discuss why Minecraft is a big deal as well as a bit about Apple’s new focus on privacy.

Links

  • Ben Thompson: Why Now For Apple Watch – Stratechery
  • Ben Thompson: Microsoft’s Good (and Potentially Great) Minecraft Acquisition – Stratechery
  • Ben Thompson: American Girl, Minecraft, and the Next Generation of Builders – Stratechery (members-only)
  • Ben Thompson: Apple Takes Aim at Google – Stratechery (members-only)

Listen to the episode here

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

Why Now for Apple Watch

The impression I get is that many people don’t really understand why I changed my mind about the Apple Watch.

  • In Apple Watch: Asking Why and Saying No I criticized the lack of an explicit “why” in the Watch presentation and questioned parts of the demo, particular those which replicated phone functionality. After all, if you are going to have your phone with you anyways, why not develop the watch accordingly? I doubled-down on this position in How Tim Cook Might Have Introduced the Apple Watch

  • Then, a week ago, I wrote What I Got Wrong About Apple Watch that laid out a much more ambitious vision for the watch that in my mind explained many of the problems I originally had. In retrospect, though, I perhaps spent too much time explaining the context for changing my mind, and not enough explaining exactly what I think Apple is up to

This post seeks to rectify that. Here, point-by-point, is why I believe Apple is launching the Watch in 2015.

  • The Watch will eventually be Digital Hub 3.0 – This is perhaps the most controversial assertion I will make, and if you disagree with me here, then the rest of my argument doesn’t really matter. I believe that in the long run – i.e. not this version of the Apple Watch, but the one several iterations down the line – the Watch will have cellular capability and the ability to interface with any number of objects, including accessories that have larger screens and/or superior input methods,1 and will be the center of your computing existence. From Apple’s perspective, that means the Watch category is the very long-term replacement for the iPhone, at least for some segment of the population. Again, I’m not talking about 2015 or probably anytime in the next five years, but rather the very long term

  • The Watch’s competition is the iPhone – This may seem a bit strange at first glance – isn’t the Apple Watch competing against Android Wear devices? – but the truth is that the number of people who will start with the premise they want a smart watch and then decide which one to buy is miniscule. Rather, the Apple Watch is competing with non-consumption: people who don’t wear watches because their smartphone is “good-enough” at telling time. For the Apple Watch to achieve the level of success that would justify it as a tentpole product for Apple, it must appeal to far wider audience than those who are already interested in smart watches; to put it another way, the Watch must be clearly superior to the iPhone in your pocket in enough ways to justify not only the additional expense of buying it but also the hassle of wearing it and charging it nightly. This means a vibrant app ecosystem that unlocks a wide array of functionality that no one company could ever come up with on its own

  • There Is no iPod market anymore – I previously argued that the Watch should be more like the iPod: explicitly dependent on the iPhone for complex functionality, with only simple essentials on the device itself. The iPod, though, arose in a world where those simple essentials were completely unique and clearly useful; you obviously weren’t going to carry a computer with you everywhere to listen to all of your music (an activity that appeals to almost everyone). In contrast (and per my previous point), everyone already carries a phone with them. A pure notifications device and health tracker would only ever be a niche device.

In sum, while I believe there is a long-term market for an even more personal computer on our wrist, I don’t believe that market will grow out of an accessory the way the iPhone grew out of the iPod. Rather, the device that makes this market must be fully formed: it must have as many of the ingredients of Digital Hub 3.0 as possible.

The question, then, is why 2015? After all, there are some key ingredients missing in the Watch, the most obvious being the lack of cellular capability. To my mind Apple had three alternatives:

  1. Release an accessory-like Watch today, then transform it into a standalone device once it had its own cellular stack
  2. Wait until the technology was ready and release a fully functional Watch in two or three years time
  3. Release a Watch in 2015 that is designed as if it is a fully functional device, even though for the next few years it needs an iPhone for full functionality

Each of these alternatives has clear tradeoffs:

  • Alternative #1: Release an accessory-like Watch – This approach has the advantage of “making sense” – since it needs an iPhone anyway, it would assume the iPhone’s presence in its design decisions, off-loading things like picture viewing and searching for movie times to the phone, and focusing on Watch-specific activities like maps, health tracking, etc.

    There are two big problems, though:

    • As I noted above, I don’t think the market for this device would be very large
    • Everything about the software – including all 3rd-party applications – would need to be completely re-thought and re-built once the constraint that the phone be present was removed. In fact, what would more likely happen is that the Watch would never fully develop into Digital Hub 3.0 because it would always in some way presume the presence of a phone. This would leave Apple open to disruption from another watch that had no such constraints (see, for example, the compromises Microsoft made with Windows 8 because they needed it to run on traditional PCs)

    Ultimately, this alternative is appealing from a perceived simplicity and elegance angle, but it would be the most detrimental to the long-term potential of the Watch by including a temporary constraint in the fundamental design of the product. I believe I was wrong to so strongly call for this approach originally

  • Alternative #2: Release the Watch when cellular technology is ready – This approach avoids the dangers of designing in temporary constraints that limit the long-term potential of the device, and it ensures that the intended role and capabilities of the Watch is clear from the get-go.

    However, there are again two significant tradeoffs:

    • While Apple is better than most at iterating and fine-tuning a product internally, there are a whole host of things that can only be improved by having a device – and a user interface, especially – out in the open. The iPhone is a perfect example of this: the first several versions of iPhone OS were very limited from an interface perspective; it was only around the iPhone 4 that the user interface was fully realized and perfected. Were Apple to wait to launch the Watch, that time-consuming work would only begin in 2017 or 2018 or whenever the Watch was ready
    • Relatedly, an app ecosystem takes time to build. Sure, there were a decent number of apps when the App Store opened in 2008, but few if any of those apps are still used today. It took a few years for developers to iterate and figure out just how apps ought to work. Again, though, were Apple to wait to launch the Watch that work of building and iterating the ecosystem would also have to wait

    I can very much appreciate the argument for this alternative, but the reality is that a fully realized Watch is not just about being complete from a technical perspective, but also being complete from a UI and app ecosystem perspective. This approach would push out the year when everything is in place to 2019 or 2020 at best

  • Alternative #3: Release a Watch that is fully functional but for cellular connectivity – This approach – the one that Apple chose – allows the hard work of UI iteration and app ecosystem development to begin in 2015. Moreover, that iteration and development will happen with the clear assumption that the Watch is a standalone device, not an accessory. Then, whenever the Watch truly is standalone, it will be a complete package: cellular connectivity, polished UI, and developed app ecosystem. It will be two years closer to Digital Hub 3.0 than Alternative #1 or #2.

    The tradeoff is significant confusion in the short-term: the Watch that will be released next year is not a standalone device. It needs the iPhone for connectivity. To be clear, this is no small matter: the disconnect certainly tripped me up for a week, and if the feedback I’ve gotten is any indication, it continues to befuddle a lot of very smart people. How on earth are normal folks who don’t follow this sort of stuff for a living going to grok the idea of a standalone Watch that actually needs an iPhone?

So why did Apple choose Alternative #3? Confusing people seems so very un-Apple-like.

In fact, I think that this tradeoff is actually a lot less serious than we who approach products from a technological perspective appreciate. Put aside the technology for a second and look at how you actually live your life: how often do you go anywhere without your smartphone? I would bet almost never. Crucially, “normal” people are the exact same: no one goes anywhere without their smartphone (remember, that’s the entire reason an accessory-like device probably wouldn’t have a big market).

What I think Apple realized was that they could, in jujitsu-like fashion, use this reality to their advantage: it’s OK – not ideal, but OK – for the Watch to use the iPhone for connectivity because the iPhone is always present anyways. Apple is not asking anyone to change their behavior in order to get the full functionality of a Watch – it is entirely additive to your day-to-day experience. To put it another way, a standalone Watch that actually needs an iPhone is incongruent only from a technical perspective; from a real-life perspective it is a non-issue.

On the flip-side, in return for making technically-oriented thinkers uncomfortable, Apple gets to reap the UI and ecosystem benefits of launching today, so that when, in a few years, the cellular technology is ready, the Watch will be a fully developed product complete with a polished UI and developed app ecosystem that taken as a whole is far ahead of anything else on the market.

Then, over many years, I believe we will use and carry our smartphones less and less even as they become bigger and more capable (in this regard, the iPhone Plus may have the additional moniker, but I believe it’s the true future iPhone) because we will have an even more portable and personal device with us all of the time. And, in true Apple fashion, they will be ok with that, because we will be replacing their central product with another one from Apple that is potentially even more lucrative.


As an addendum, I am very aware that there are many points in this analysis where I may be wrong:

  • The smartphone may be the perfect device, never to be supplanted by the Watch (just as, for example, many believe that iPads will never fully supplant laptops). Still, even if this is the case, I think Apple would consider iPad-level sales a success
  • The Watch may not be technically capable of being a fully-featured device. However, I highly doubt this true; given how far ahead of the competition the A8 is, I see no reason to doubt the capabilities of the S1
  • The confusion about a standalone Watch that is technically not standalone may be too much to overcome from a marketing perspective. I definitely think this is why the presentation was so muddled: Apple wanted to convey that this was a standalone device that would one day be the only device we need all of the time, but they couldn’t actually say that

In the end, this all comes back to my first point: I believe the future of computing will always track towards more personal and more portable, and the Watch is really the perfect device. As recounted in Bloomberg Businessweek:

Ive, 47, immersed himself in horological history. Clocks first popped up on top of towers in the center of towns and over time were gradually miniaturized, appearing on belt buckles, as neck pendants, and inside trouser pockets. They eventually migrated to the wrist, first as a way for ship captains to tell time while keeping their hands firmly locked on the wheel. “What was interesting is that it took centuries to find the wrist and then it didn’t go anywhere else,” Ive says. “I would argue the wrist is the right place for the technology.”

Moreover, if this is true, this is the perfect place for Apple; in retrospect, the iPod, an accessory that was always very price-competitive, was an aberration. Apple makes ever more personal general purpose computers at a handsome premium that is justified by their superior user experience. Thinking the watch would not be in that vein was the mistake I have since rectified.

  1. I described this vision in Digital Hub 2.0

Sponsor: Igloo

Igloo is an intranet you’ll actually like: built with easy-to-use apps, like shared calendars, task management, file sharing and more. It’s everything you need to work better together, in one very configurable cloud platform.

With Igloo’s responsive design, your intranet already handles a range of devices, it will even work on your iPhone 6 or 6 Plus right from the start. Share status updates, manage your task list, download documents — almost everything you can do on your desktop, you can do on your phone. Plus, Igloo is free to use with up to ten of your favorite co-workers. Sign up now to start building your mobile-friendly Igloo.

My thanks to Igloo for sponsoring Stratechery this week

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