Good morning,
There were two direct references to the tech industry in last night’s State of the Union address from President Biden:
- Intel CEO Pat Gelsinger was a guest as President Biden called for Congress to pass the CHIPS act.
- Frances Haugen was a guest as President Biden called for a ban on targeted advertising to children.
On to the update:
Amazon Launches Luna
From The Verge:
Amazon Luna — the company’s cloud-based game streaming service — is officially launching in the US today for anyone to use, in addition to adding a variety of new features, including free games for Amazon Prime members. Luna was announced in fall 2020, but since then, it has only been available to a limited number of customers through an invite-only “early access” program. Today’s launch, however, finally opens up the service for anyone to use in the United States, which could significantly expand the number of Luna customers.
Alongside the broader launch, Amazon also announced three additional “channels” (Luna’s term for bundles of games that customers can subscribe to on a monthly basis, similar to Microsoft’s Xbox Game Pass) that customers will be able to enjoy. The most notable of the new additions is the Prime Gaming Channel, which will offer Amazon Prime members a selection of free games to play on Luna that rotate each month. To start things off in March, Prime members will get access to Devil May Cry 5, Observer, System Redux, PHOGS!, and Flashback. Additionally, Immortals Fenyx Rising will also be available to play for free but only from March 8th through March 14th (instead of the entire month, as is the case for the other titles listed).
Back when Luna was first announced I wondered if there might be a Prime tie-in coming; the obvious analogy to Luna’s channel model — a new “Retro Channel” and “Jackbox Games Channel” join the previously announced “Luna Plus Channel” and “Ubisoft Channel” — is Prime Video’s channel model whereby Amazon makes money by selling subscriptions to services like Disney+. The reason why people might be using Prime Video in the first place, though, is because Prime Video also contains lots of shows that are bundled with your Prime membership.
I wrote about Prime Video and the difficulties I had in figuring out Amazon’s approach to Prime generally in 2020 Bundles:
It took me a long time to figure out what exactly Amazon was trying to accomplish with Amazon Prime Video, its now 14 year-old streaming service. The most obvious explanation is that it was a way to acquire customers for Amazon Prime, the then-2-day shipping service with which it was bundled. But then Amazon started offering Prime Video subscriptions on its own — was it a Netflix competitor? Or was Prime Video a loss leader for Amazon Channels, where Amazon made money selling other streaming services? Meanwhile, Amazon Prime keeps adding on more and more disparate services: delivery, video, music, video games, photo storage, a clothing service, books, magazines — the Prime benefits page has 28 different items listed!
To some extent, the answer is “all of the above”, but it is notable that many customers only find out about many of these features after they are subscribers; Amazon may tell you about the book benefits when you buy an e-book for example, Amazon Music when you set up an Echo, or remind you about Prime Video when you checkout. The most valuable impact in these cases is giving you yet another reason to not churn.
This makes sense when you remember that the business model for the Amazon Prime bundle is [not just] subscription revenue [but also] increasing usage of Amazon.com. Back in 2015 Prime customers were estimated to spend an average of $1,500/year on Amazon, compared to $625 for non-Prime customers; according to eMarketer earlier this year, 80% of Prime subscribers start their product search on Amazon, and only 12% on Google, while that split is 50/50 for non-Prime subscribers.
To that end, simply keeping Amazon Prime subscribers is the biggest possible win for Amazon broadly. Thus the continuous drive to add more and more features; sure, you may find 90% of them useless, along with everyone else, but as anyone who has managed a feature-rich product knows, the 10% that are considered useful vary considerably!
Forgive the long excerpt, but the exact same reasoning clearly applies to Luna and the “Prime Gaming Channel”: it is a customer acquisition channel for selling other gaming channels, it is a competitor for other gaming platforms, from streaming to console to mobile (remember, the true scarce resource is time), and above all it is another reason to remain a Prime customer and do all of your shopping on Amazon.
On the flip side, while this is a repeat of Amazon’s strategy in video, I quite like the fact that it is very innovative in terms of gaming. The least creative product from a business model perspective has to be Google Stadia: selling individual games that you can play over a streaming service instead of on a console is literally copying a business model that was developed at a time when video games were physical objects that you had to get in your car and drive to the store to get — leave it to Google to pull off an incredible technical feat while putting absolutely zero effort into a go-to-market strategy that leverages said feat.
Microsoft, of course, is leaning into gaming-as-a-service; in this case the Xbox provides a great channel to sell Xbox Game Pass, but if you have a console you’re going to want to play games locally — isn’t that the point of having a console? — which introduces some amount of friction into the process (you can, of course, play the Xbox streaming service from your Xbox, but then why do you have an Xbox?). Amazon, however, freed from having to think about local hardware at all, can really explore what is possible from a business model perspective when any game on the service is only a button press away.
I would also go back to my argument that Amazon should buy Peloton; Peloton Digital could play the same role that the “Prime Gaming Channel” or Prime Video do: attract new customers, reduce churn, and work as a channel for hardware (which reduces churn even further).
Apple and Russia
From the Wall Street Journal:
Apple Inc. has stopped selling iPhones and other products in Russia following the country’s invasion of Ukraine. The Cupertino, Calif., tech giant on Tuesday said the sales halt came along with blocking the download of the state-sponsored news outlets through its App Store outside of Russia. “We are deeply concerned about the Russian invasion of Ukraine and stand with all of the people who are suffering as a result of the violence,” Apple said Tuesday. “We are supporting humanitarian efforts, providing aid for the unfolding refugee crisis, and doing all we can to support our teams in the region.”
Silicon Valley’s big technology companies have been facing greater pressure to cut off services and content to Russia. On Friday, Ukraine’s Vice Prime Minister Mykhailo Fedorov asked Apple Chief Executive Tim Cook to stop supplying Apple products and services to Russia, including halting access to the App Store. The App Store remained operational in Russia. During the third quarter of last year, Apple held 15% of the smartphone market in Russia behind Samsung and Xiaomi, according to researcher IDC.
At first glance this seems like the most drastic move taken by a tech company yet, but at second glance it seems an awful lot like a Strategy Credit. Specifically, it might be more accurate to say that Apple stopped selling hardware products in Russia following economic sanctions that crashed the ruble. After all, this wouldn’t be the first time; from Reuters last year:
Turks attempting to buy iPhones and other electronics received online error messages on Wednesday, including from Apple Inc’s local website, after a historic 15% plunge in the lira the day before caused havoc for prices. The currency slipped back towards its record low on Wednesday, driven by worries over broader fallout for the economy after President Tayyip Erdogan defended recent sharp rate cuts despite widespread criticism and calls for a reversal…The local prices of phones and computers were some 10% below U.S. prices following the sudden depreciation in the lira.
Apple sales resumed in Turkey five days later with a 25% price hike. This isn’t the only example either: another one was Russia! From Bloomberg in 2014:
Apple Inc. halted online sales of its products in Russia due to “extreme” ruble fluctuations, showing how the currency’s swings are rippling out to international businesses. The iPhone and iPad maker stopped sales from its Web store as Russia’s currency lost as much as 19 percent today, with a surprise interest-rate increase failing to stem a run on the currency. The ruble briefly sank beyond 80 per dollar, and bonds and stocks also tumbled.
This makes total sense, for all of the reasons that hardware is more difficult than software:
- Software has zero marginal costs, which means there are no “bad” customers. This is especially true in the case of consumer Internet services which are often provided for free and which monetize via advertising sold at auction; the latter means that ads bought with rubles could very well be replaced by ads bought with stronger currencies, and even if they are not, Facebook or Google are simply making less money with no opportunity cost.
- Hardware obviously has significant marginal costs; selling in last week’s rubles could actually tip a product to a loss, even one that is as profitable as the iPhone. And, even if it simply eats into profit margin, there is the opportunity cost of not selling that phone to a more attractive market.
What makes this point more than anything, though, is the fact that Apple didn’t shut down the App Store. That is a software business, with zero marginal costs (beyond payment fees); Apple may lose some money on in-app purchases being sold for less (in dollar terms), but there isn’t any risk of actual losses in either dollars or opportunity cost.
Of course there are legitimate arguments to be made about keeping the App Store up as well: it’s the only way for end users to get VPNs onto their phones, for example, or other alternative news sources to state run media; given what I wrote yesterday I am, unsurprisingly, opposed to blocking it. It’s worth remembering, though, that all of those same arguments apply to iPhones themselves. Apple said in a statement about its operations in China:
Our teams work relentlessly to bring secure, privacy-protecting technology to our users in China and around the world — technology that helps people share ideas, follow their curiosity, and harness their creativity. At the end of the day, we believe the best way to promote the values of an open society is to remain engaged, and to continue making the technology our users count on us to deliver.
Secure, privacy-protecting technologies certainly seem particularly important in authoritarian regimes, and I’m not being snarky — I think Apple agrees. That noted, in this case it may take more than a few days for iPhones to go back on sale: Apple’s statement clearly tied the pause in product sales to the invasion, so I guess this credit is also a tax.
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