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Podcast: Exponent Episode 015 – Consoles and Disruption

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

In this week’s episode we discuss whether or not consoles will be disrupted. This episode was recorded a week ago (immediately after last week’s episode), before Ben wrote his pieces Games and Good Enough and Games and New Market Disruption.

Links

  • Ben Thompson: How Apple TV Might Disrupt Microsoft and Sony – Stratechery
  • Ben Thompson: Games and Good Enough – Stratechery
  • Ben Thompson: What Clayton Christensen Got Wrong – Stratechery
  • Ben Thompson: Gaming and New Market Disruption – Stratechery
  • Medallia Receives $50M in New Funding to Meet Growing Market Demand for Software that Makes Companies More Customer Centric – Medallia

Listen to the episode here

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

Podcast: Vector – Turtles All the Way Down

I joined the Vector podcast to talk about Apple University, Microsoft stack ranking, patents, Samsung copying, iPhone screen sizes, native advertising, and a whole lot more. I think you’ll enjoy this one.

You can listen to the episode here.

Amazon: Not an E-commerce Company

Let’s start with the premise that Twitch, the video-game watching network, is the next ESPN – you know, the jewel in Disney’s crown that, by itself, is worth $50.8 billion. Like ESPN, Twitch is about live competition, and, like ESPN, Twitch does exceptionally well in the highly desirable young male demographic.1 Obviously this is the best possible outcome, far-fetched though it may sound. It is certainly an outcome that would make Amazon’s purchase of Twitch for $970 million an amazing deal. It would not, however, have anything to do with e-commerce.

Just a few weeks ago I wrote in Losing my Amazon Religion about Amazon’s focus on Prime Video in particular:

It’s this focus on original and exclusive content – and devices that deliver it – that concerns me, and not because it’s expensive. Rather, what exactly does this have to do with e-commerce?

Needless to say, the Twitch acquisition hasn’t exactly quelled my concerns. It has, though, led me to question my premise; if Amazon is behaving, shall we say, erratically, the issue is perhaps not with Amazon but with my understanding of the company. So I went back and reread the origin story of Amazon in Brad Stone’s excellent The Everything Store:

[John] Doerr’s optimism about the Web mixed with Bezos’s own bullish fervor and sparked an explosion of ambitions and expansion plans. Bezos was going to do more than establish an online bookstore; now he was set on building one of the first lasting Internet companies.

Over the following pages Stone documents how Amazon expanded from books to music and then to DVDs. These categories, along with packaged software (including games) eventually made up the “Media” category in Amazon’s earnings. Today this media category is about 25% of Amazon’s revenue, but, according to my understanding, almost all of Amazon’s “profits.” Said profits are reinvested into all the other parts of Amazon’s business, but, it must be asked, to what ends? Is Amazon really an e-commerce company? Or are they a company bent on dominating the world?


Returning to Twitch, I can think of three possible reasons for Amazon’s purchase:

  • Amazon is looking to buttress their media business – That Media business that underpins the Amazon machine is not in the best of shape; traditional media forms are going away, and, except for books, Amazon does not have a ready-made replacement from a revenue standpoint. In this view, Twitch offers a new revenue model (ads, primarily, although there are also premium subscriptions) that can help fill this gap.

  • Amazon wants to challenge Valve and/or Sony and Microsoft – I think this is a very underreported aspect of this deal. Steam in particular has taken a significant bite out of Amazon’s packaged software business, and I know that Amazon has at least internally considered building a direct challenger. Amazon has also included gaming capability into the Fire TV, including an optional controller, and has bought their own gaming studio, basically following the script I laid out in How Apple TV Might Disrupt Microsoft and Sony. However, as I insinuated in Gaming and Good Enough, hard core gamers are very unlikely to so easily abandon the established players. In this view Twitch is a backdoor way to “get in” with hardcore gamers; imagine a Fire TV built around Twitch and Amazon’s own games.

  • Amazon wants to rule the world – I put it this way only partly in jest, because I’m starting to suspect this is a bigger factor than anyone – including Amazon’s everpatient investors – fully appreciates. Remember, Bezos sold books not because he was obsessed with being a bookseller, but because he identified a dominant strategy; as Stone’s book suggests, perhaps Bezos’s goal was simply to build a dominant company, and e-commerce has only ever been a means to an end.

The second reason, that this deal was about gaming, is interesting from a tactical perspective, but the far more intriguing question is the weight one gives to reasons one and three. If you buy reason three – that Bezos wants to rule the world – then there is even more urgency attached to reason one. To be clear: Amazon’s continued expansion is built on the profits from its media category, but it is that category that is the most under threat from the digitalization of said media. In other words, what if Twitch is both offense and defense?

Regardless, the takeaway for me – and what should be the takeaway for all of Amazon’s investors – is that Amazon is not an e-commerce company. No more pointing at the fact that e-commerce is only 6% of U.S. retail, or that Amazon’s multi-sided network of merchants and customer base are the key factors in determining their future success. No, the company is going for something a whole lot bigger, even as their foundation is being slowly watered down by the same Internet that made Bezos feverish nearly 20 years ago.

  1. Twitch’s video game playing “athletes”, though, peak far earlier than professional athletes according to this fascinating article in The Verge

Gaming and New Market Disruption, and the Week in Daily Updates

The main page content on Stratechery is free for all readers, but I also offer the Daily Update via email and RSS for $10 per month/$100 per year. This is one of the items sent out in this week’s Daily Updates. To read all of the Daily Updates, visit the Membership page

The fastest growing demographic in gaming is adult females. From the Wall Street Journal:

Female gamers made up about 48% of the game-playing public in the U.S. this year, according to a report recently published by the Entertainment Software Association, a U.S. game industry trade group. That is up sharply from 40% in 2010. What is more, women over 18-years-old now represent a significantly larger portion of the U.S. game-playing population than boys under 18, a demographic that has traditionally been seen as a core target group for game companies. The ESA based its findings on a study of 2,200 U.S. households.

A recent survey from Nielsen Holdings NV, a U.S. consumer research company, concluded that women gamers in the U.S. are most likely to play games on personal computers, mobile devices and Nintendo’s Wii console. In fact, U.S. women are more likely than U.S. men to play on the Nintendo Wii, Nielsen said, while they are equally likely as men to play games on Apple devices…

The growing number of female gamers largely comes down to a surge in so-called casual mobile game, a genre of games boosted by the fast adoption of smartphones, executives from game companies say.

So, to sum it up, mobile and casual gaming, dismissed by traditional gamers, are in fact growing hugely. Ben, you were wrong to change your mind about whether or not consoles would be disrupted!

Not exactly, and I think I should have been more clear on this specific point: I believe that mobile and casual gaming, if it is disruptive, is a case of “new market” disruption, not “low-end” disruption. Clayton Christensen first defined these two terms in The Innovator’s Solution:

There are two different types of disruptions, which can best be visualized by adding a third axis [to performance and time]…The third dimension that extends toward us in the diagram represents new contexts of consumption and competition, which are new value networks. These constitute either new customers who previously lacked the money or skills to buy and use the product, or different situations in which a product can be used – enabled by improvements in simplicity, portability, and product cost…

We will refer to disruptions that create a new value network on the third axis as new-market disruptions. In contrast, low-end disruptions are those that attack the least-profitable and most overserved customers at the low end of the original value network.

In other words, if I made an error in comparing iOS/Android to mobile gaming/consoles, it was in conflating low-end disruption (i.e. cheaper, modular Android theoretically disrupting the iPhone) with new market disruption (i.e. casual mobile gaming theoretically disrupting dedicated gaming devices). Clearly anything mobile-related is a perfect example of a “different situation in which a product can be used.”

Still, though, the point I was trying to make was not that Android won’t take up the majority of the market (obviously false) or that mobile gaming won’t do the same (it probably will); rather, I dispute the assumed end game. Again from the Innovator’s Solution (emphasis mine):

Once the disruptive product gains a foothold in new or low-end markets, the improvement cycle begins. And because the pace of technological progress outstrips customers’ abilities to use it, the previously not-good-enough technology eventually improves enough to intersect with the needs of more demanding customers. When that happens, the disruptors are on a path that will ultimately crush the incumbents.

This is the exact paragraph that underlines the (mercifully-fading) Apple is doomed narrative, and it’s the same paragraph that led so many – again, including myself – to assume that consoles are on their last legs. (And, to be clear, Christensen states that incumbent extinction is the end-game for both “new or low-end” disruptions).

My contention both in the case of Apple and in consoles is that incumbents who are primarily differentiated on the experience of the product, in markets where the buyer is the user, are not in fact doomed. Growth may be limited – as I have consistently said is the case for both Apple and for consoles – but there will always be a market willing to pay for the superior experience delivered by an integrated offering.

The long-term theoretical danger for both Apple and consoles is that some other aspect of the experience outside of their control abandons the smaller high-end market for the booming new (or low-end) market. In the case of both, the danger is losing publishers/developers. That, though, is why I concluded my piece by pointing out that there is still a lot more money in consoles, just as there is in iOS. True, that may change, but it hasn’t yet; when and if it does, I think I’ve demonstrated I’m both capable and willing to change my position.


The full list of topics covered this week in the Daily Update include:

  • The New Structure of Mobile Gaming
  • The Hidden Cost of Microsoft’s Devices
  • Amazon Affiliate Links in the Washington Post
  • Twitter is Great for Unprofitable News
  • Microsoft’s Chromebook Response
  • Google to Offer Account to Children
  • Print, Chinese Walls, and “Objective” Journalism
  • Twitter’s New Photo-removal Policies
  • Steve Ballmer Leaves Microsoft’s Board
  • What Consoles Say About iPads
  • Uber Opens API
  • The Samsung Nook
  • Gaming and New Market Disruption
  • Why the PS4 is Winning
  • Uber Testing On-Demand Product Deliveries

To read all of these updates and to receive future updates, please visit the membership page and sign up!

I’d like to thank all of Stratechery’s subscribers for their support, and for making this site possible.

Podcast: Exponent Episode 014 – The Rise of the Algorithm

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

In this week’s episode we spend a good bit of time revisiting the native ads discussion, then dive into the different ways that Twitter and Facebook have handled the news this week. From there we discuss Twitter’s timeline changes, the realities of venture capital, and whether or not our entire economic system will survive the automation revolution. Yes, it gets deep quickly!

Links

  • Ben Thompson: Print, Chinese Walls, and “Objective” Journalism – Stratechery (members only)
  • Clay Shirky: Last Call – Medium
  • Jay Rosen: When Quoting Both Sides and Leaving it There is the Riskier Call – PressThink
  • Hamilton Nolan: Time Inc. Rates Writers on How “Beneficial” They Are to Advertisers – Gawker
  • Derek Willis: New Republican Leader Finds New Friends, and Quick Cash – New York Times
  • Marco Arment: I’ll Never Fly Amazon Again – Marco.org
  • Ben Thompson: Twitter is Great for Unprofitable News – Stratechery (members-only)
  • Mathew Ingram: Twitter vs. Facebook as a news source – GigaOm
  • Matt Buchanan: The Twitter of Tomorrow – New Yorker
  • Humans Need Not Apply – YouTube

Listen to the episode here

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

Games and Good Enough

Two months ago I wrote How Apple TV Might Disrupt Microsoft and Sony. Then, about a month later, I went and bought a Wii U. And, a month after that, I bought a 3DS. And now I’m writing another article about gaming, and I think I’ve changed my mind.

Still, it’s always dangerous to write about anything based on little more than your personal experience, so I’ve been trying to get up to speed on what is happening with gaming. And it’s actually pretty darn encouraging. Sony has sold 10 million PS4s, while Microsoft has sold at least 5 million Xbox Ones. Nintendo is still hurting, but Mario Kart 8 has moved 2.82 million copies while the 3DS now has 9 titles that have sold more than 1 million units. Meanwhile, in PC land Nvidia beat expectations largely because of continued growth in demand for their GeForce graphics processors. At the same time, mobile game companies like King are struggling, and the iPad, which so many – including myself – presumed would take a big chunk out of consoles, has seen its sales slow dramatically (last quarter it was down nine percent year-over-year).

So why did I buy not one but two new consoles? And what, if anything, might that have to do with these rather impressive results?


Last fall I wrote what is probably still my favorite piece on this site: What Clayton Christensen Got Wrong. In the piece I took the idea of low-end disruption head-on. Basically, the theory states that in an immature market, the integrated solution has the advantage, but as a market matures, modular solutions become “good-enough” and are able to leverage a price advantage – and, over time, a scale advantage – to take over the market.

My fundamental contention was that this theory primarily applied to business markets where the buyer was not the user and prices and feature lists reigned supreme. In consumer markets, on the other hand, where the buyer and user are the same person, there would always be a significant part of the population that prioritized the user experience only an integrated solution can deliver, making the high end a profitable segment despite higher prices. My prime example was, of course, the continued success of the iPhone in the face of good-enough Android (please do read the whole thing).

And yet, when I wrote How Apple TV Might Disrupt Microsoft and Sony, I basically built my entire argument on the idea of low-end disruption. My thesis was that a general purpose Apple TV would offer good enough gaming that would appeal to a significant part of the population, and, over time, peel away even those at the high end. That’s what made my 3DS purchase in particular so interesting.


John Gruber perfectly articulated why the 3DS and any future Nintendo handheld is doomed in More on Nintendo and Handheld Gaming:

What’s different about the post-iPhone world of mobile computing is that the buying decision is no longer about or, it’s about and. Pre-iPhone, someone interested in a handheld game device would choose between Nintendo’s offering or someone else’s. Nintendo did well in that world, selling more than enough devices to succeed. Today, though, someone deciding to buy a dedicated handheld game device is, more likely than not, deciding whether to buy something to carry in addition to the mobile device they already carry everywhere. This is an entirely new scenario for Nintendo, and as I see it, they are on course to head right over a cliff.

It’s actually worse than Gruber likely realized: the 3DS is a pretty atrocious piece of hardware relative to an iPhone. Because of the silly inclusion of 3D, the effective resolution is only 400×240 on the DS’s main screen, and it is absolutely brutal to look at. This is not a situation where post-PC devices are on pace to deliver superior graphics: they are already years ahead.

And yet, screen quality notwithstanding, I have probably put in more gaming hours on the 3DS in the last two weeks than I have in the previous two years on the iPhone. Because here’s the thing: touch sucks for playing games.1 The experience of using a dedicated device with built-in gaming controls and games designed specifically for said device mean a great deal to this user and buyer. It means enough that, especially when I’m traveling, I will gladly carry an additional device.


Again, as I noted at the top, I very much hesitate to read too much into my own personal experience. But I’m beginning to suspect that consoles may be a bit more resilient than many of us in tech may have first believed. And, by extension, I suspect my critique of low-end disruption may have legs: when users are buyers the user experience matters, immensely. And the user experience of a console is, and likely will remain, far ahead of any sort of touch device when it comes to many (but not all) types of games. Moreover, I now suspect that an Apple TV that supports gaming will be less disruptive than I suggested as well; as long as the controller is optional, as I suspect it would be, the immersive experience of a dedicated console will be optional as well.

That’s not to say the gaming business is going to thrive: in this Nintendo is indeed a cautionary tale. It seems increasingly clear that the Wii’s incredible success was the worst thing that could have happened to the company. What made the Wii such a hit was that it dramatically increased the market for consoles: lots of people who would not have normally been interested in a PS3 or Xbox 360-type device couldn’t resist Wii Sports. The problem, though, is that the Wii market, by virtue of not being people who particularly valued the traditional gaming experience, was the exact same market likely to see touch gaming as good enough. Keep in mind the Wii launched at the end of 2006, just weeks before the iPhone. In retrospect it was the last hurrah of the gaming middle ground, of a piece with the iPod, point-and-shoot cameras, and other dedicated but low-end devices.

What has happened in all of those markets – indeed, what is happening to smartphones as well – is a bifurcation between the high and low ends. Cameras is a particularly good example: DSLR sales have remained strong2 even as the point-and-shoot cateogry has all but disappeared, replaced by good enough smartphone cameras. That’s the exact same pattern we’re seeing in gaming: the PS4 (and to a lesser degree, the Xbox One) are doing much better than expected, while the lower-priced and lower-specced Wii U is hurting. Nintendo’s mistake was not realizing that the Wii’s market was devoured by touch devices; they should have built a console that was top-of-the-line.

There is one more fascinating parallel between Android/iOS and touch gaming/console gaming: even though Android has far greater market share, the best apps are generally found on iOS largely because the most money is there. Similarly, while gaming as a whole was worth $93 billion last year, only $13 billion of that was in mobile, and much of that in free-to-play games like Candy Crush Saga that appeal to very different players than traditional gamers. In other words, it’s not at all a given that publishers will abandon consoles simply because the market share of mobile devices is greater.

In short, I believe there are factors more important than just market share, at least when it comes to smartphones. Why not when it comes to games?

  1. Board games on the iPad being the big exception, at least for me
  2. They did start to slip last Christmas

Podcast: This Week in Tech – It is Brisk

I joined Leo Laporte, John C. Dvorak and Jason Snell on This Week in Tech. We covered a wide range of topics, including Apple University, OnePlus’ appalling “Ladies First” contest, Facebook’s timeline algorithm, Twitter’s capacity for both good and evil, and a whole lot more. Plus murses!

You can download the show here.