Beachheads and Obstacles

The fact that Amazon held its annual hardware event the same day as the keynote for Facebook’s Oculus Connect conference is almost certainly a coincidence. It was, though, a happy one, at least as far as Stratechery is concerned: these two events, wildly disparate in terms of presentation and content, have more in common than it might seem.

Revisiting the Smartphone Wars

In 2013, when Stratechery started, the widely held belief was that the iPhone, innovative though it may have been, was in serious trouble in the face of Android’s increasing marketshare. Henry Blodget wrote a useful articulation of the bear case on Business Insider:

If smartphones and tablets were not a platform — if the only thing that mattered to the value of the product and a customer’s purchase decision was the gadget itself — then Apple’s loss of market share would not make a difference. Apple zealots would be correct when they smugly assert that what matters is Apple’s “profit share” not “market share.”

But smartphones and tablets are a platform. Third-party companies are building apps and services to run on smartphone and tablet platforms. These apps and services, in turn, are making the platforms more valuable. Consumers are standardizing their lives around the apps and services that run on smartphone and tablet platforms. Because of these “network effects,” in platform markets, dominant market share is huge competitive advantage. In platform markets, as the often-hated but always insanely powerful Microsoft demonstrated for decades in the PC market, the vast majority of the power and profits eventually accrue to the market-share leader.

In this view there is still a premium market, but only within the dominant ecosystem. This, Blodget argued, was Apple’s problem: soon the company would have no market, because Android would have the ecosystem, and by extension all of Apple’s premium customers.

Of course this turned out to be mistaken, for reasons I laid out in What Clayton Christensen Got Wrong.

  • First, integration provided user experience benefits that premium customers valued
  • Second, those premium users were more likely to pay for apps, which increased the attraction of iOS to developers
  • Third, the absolute size of the smartphone market was so big that both iOS and Android were large enough to be attractive to developers

Note, though, that just because Blodget and company were wrong about the iPhone’s prospects does not mean they were wrong conceptually: ecosystems do matter. However, instead of one ecosystem devouring the entire premium versus ubiquity landscape, Apple and Google split it up rather neatly:

Apple and Google's Ecosystem Duopoly

Amazon and Facebook were two of the more prominent companies that found out this reality the hard way.

Mobile Successes and Failures

Apple and Google may be the first companies people think of when you ask who won mobile, but Amazon and Facebook were not far behind.

Amazon spent the smartphone era not only building out, but also Amazon Web Services (AWS). AWS was just as much a critical platform for the smartphone revolution as were iOS and Android: many apps ran on the phone with data or compute on Amazon’s cloud; mobile also created a vacuum in the enterprise for SaaS companies eager to take advantage of Microsoft’s desire to prop up its own mobile platforms instead of supporting iOS and Android, and those SaaS companies were built on AWS.

Smartphones, meanwhile, saved Facebook from itself: instead of a futile attempt to be a platform within the browser, mobile made Facebook just an app, and it was the best possible thing that could have happened to the company. Facebook was freed to focus solely on content its users wanted and advertising to go along with it, generating billions of dollars and a deep moat in targeting advertising along the way.

What is not clear is if Amazon’s and Facebook’s management teams agree. After all, both launched smartphones of their own, and both failed spectacularly.

Facebook’s attempt was rather half-assed (to use the technical term). Instead of writing their own operating system, Facebook Home was a launcher that sat on top of Android; instead of designing their own hardware, the Facebook One was built by HTC. Both decisions ended up being good ones because they made failure less expensive.

Amazon, meanwhile, went all out to build the Fire Phone: a new operating system (based on Android, but incompatible with it), new hardware, including a complicated camera system that included four front-facing cameras, and a sky-high price to match. It fared about as well as the Facebook One, which is to say not well at all.

That, though, is what made last week’s events so interesting: it is these two failures that seemed to play a bigger role in what was announced than did the successes.

Amazon and Facebook’s Announcements

Start with Amazon: the company announced a full fifteen hardware products. In order: Echo Dot with Clock, a new Echo, Echo Studio (an Echo with a high-end speaker system), Echo Show 8 (a third-size of the Echo with a screen), Echo Glow (a lamp), new Eero routers, Echo Flex (a microphone only Echo that hangs off an outlet), Ring Retrofit Alarm Kit (that lets you leverage your preinstalled alarm), Ring Stick Up Cam (a smaller Ring camera), Ring Indoor Cam (an even smaller Ring camera), Amazon Smart Oven (an oven that integrates with Alexa), Fetch (a pet tracker), Echo Buds (wireless headphones with Alexa), Echo Frames (eyeglasses with Alexa), and Echo Loop (a ring with Alexa). Whew!

This is an approach that is the exact opposite of the Fire Phone: instead of pouring all of its resources into one high-priced device, Amazon is making just about every device it can think of, and seeing if they sell. Moreover, they are doing so at prices that significantly undercut the competition: the Echo Studio is $150 cheaper than a HomePod, the Echo Show 8 is $60 cheaper than the Google Nest Hub, and the new Eero is $150 cheaper than the product Eero sold as an independent company. Amazon is clearly pushing for ubiquity; a whale strategy this is not.

Facebook, meanwhile, effectively consolidated its Oculus product line from three to one: the mid-tier Oculus Quest, a standalone virtual reality (VR) unit, gained the capability to connect to a gaming PC in order to play high-end Oculus Rift games; Oculus Go apps, meanwhile, gained the capability to run on the relatively higher-specced Oculus Quest. It is not clear why either the Go or Rift should be a target for developers or customers going forward.

The broader goal, though, remains the same: Facebook is determined to own a platform; the lesson the company seems to have drawn from its smartphone experience is the importance of doing it all.

Beachheads and Obstacles

What Amazon and Facebook do have in common — and perhaps this is why both seem to look back at their very successful smartphone eras with regret — is that Apple and Google are their biggest obstacles to success, and it’s because of their smartphone platforms.

Amazon to its great credit — and perhaps because the company did not have a smartphone to rely on — found a beachhead in the home, the one place where your phone may not be with you. Now it is trying to not only saturate the home but also extend beyond it, both through on-body accessories and also an expanding number of deals with automakers.

Facebook, meanwhile, is searching for a beachhead of its own in virtual reality. That, the company believes, will give it the track to augmented reality, and by extension, usefulness in the real world.

Facebook and Amazon are building beachheads to take on Apple and Google

Amazon’s challenge is Google: Android phones are already everywhere, and Google is catching up in the home more quickly and more effectively than Amazon is pushing outside of it. Google also has a much stronger position when it comes to the sort of Internet services that provide the rough grist of intelligence of virtual assistants: emails, calendars, and maps.

Facebook, meanwhile, is ultimately challenging Apple: augmented reality is going to start at the high end with an integrated solution, and Apple has considerably more experience building physical products for the real world, and a major lead in chip design and miniaturization, not to mention consumer trust. Moreover, while there is obviously technical overlap when it comes to creating virtual reality and augmented reality headsets, the product experience is fundamentally distinct.

Lessons Learned

I’ve been pretty skeptical about Facebook and Oculus all along, both at the time of purchase and last year. I’d like to say I’ve changed my mind, but frankly, last week’s keynote made me question whether Facebook learned any lessons from mobile at all. Zuckerberg said in the keynote opening:

We experience the world through this feeling of presence and the interactions that we get with other people, which is why Facebook’s technology vision has always been about putting people at the center of your computing experience. We’ve mostly done that so far through building apps. I don’t think it’s an accident that a lot of the top-used and biggest apps that are out there are social experiences that put people at the center of the experience, because that’s how we process things.

But there is only so much you can do with apps, without also shaping and improving the underlying platform. I find it shocking that we’re here in 2019 and our phones and our computers are still organized around apps and tasks and not people that we are actually present with. I feel like we can help all of us together deliver a unique contribution to this field by helping to ensure that the next platform changes this.

Zuckerberg is, in effect, saying that he finds it shocking that Facebook Home didn’t succeed. I think the reasons were pretty clear, and a lack of distribution or high-end hardware was not the primary problem. The fact of the matter is that while social connection on our phones is important — perhaps the most important — it is not the only job we ask phones to do. That is why Facebook is an app and not a platform, and that’s ok! Apps, particularly those of Facebook’s scale and advertising prowess, are fantastic businesses. And apps shouldn’t be platforms.

Amazon, on the other hand, seems to have learned the right lessons from its mobile failures; what is notable about the company’s approach to Alexa is that it leverages and learns from the mobile era. Alexa benefits from Amazon’s investments in data centers and networking, interacts with both iOS and Android to the greatest extent possible, and is roughly inline with Amazon’s overall business — making buying things that much more convenient. Alexa is an operating system for the home, and perhaps beyond.

This isn’t a guarantee of success, of course. Google is a formidable competitor, with multiple advantages. It is particularly hard to see Alexa gaining traction outside the home. The only reason Amazon has a chance is because building on strengths is always better than doing something completely new and different from what has made you successful in the past.