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  • Pleco: Building a Business, not an App

    This past week has not been the first outbreak of independent developer angst over the app store, but it feels like it has been one of the more intense. The pump was primed by the news that Kim Kardashian: Hollywood is on pace to make $200 million this year, news that was in stark contrast to Brent Simmons’ observation that there didn’t seem to be many indie iOS developers (I think his is the post that kicked the discussion off; Simmons’ blog contains a good roundup of all the posts that ensued).

    The high point though — or low point, I suppose — was when Jared Sinclair revealed the sales numbers for his excellent iOS RSS reader Unread:

    Unread for iPhone has earned a total of $32K in App Store sales. Unread for iPad has earned $10K. After subtracting 40 percent in self-employment taxes and $350/month for health care premiums (times 12 months), the actual take-home pay from the combined sales of both apps is $21,000, or $1,750/month.

    Considering the enormous amount of effort I have put into these apps over the past year, that’s a depressing figure. I try not to think about the salary I could earn if I worked for another company, with my skills and qualifications. It’s also a solid piece of evidence that shows that paid-up-front app sales are not a sustainable way to make money on the App Store.

    First off, Unread is a great app that I myself use, and Sinclair is a very interesting and provocative blogger who has written some really strong pieces about design and iOS 7 in particular. I’ve also had the pleasure of meeting him in person and consider him a friend, and admire his willingness to share his financials even if they aren’t as great as he might have hoped.

    That said.

    Sinclair’s results are not a “solid piece of evidence” of anything. They are an anecdote. And as long as we’re drawing grand conclusions from single data points, I thought it might be useful to look at someone on the other side of the spectrum. So I called up another friend of mine, Mike Love.

    pleco-phone

    Love makes Pleco, the preeminent Chinese dictionary on the app store (iOS, Android). Pleco is not by any means a new app; in fact, it was first developed for the Palm (I actually bought a Palm in 2003 for the express purpose of using Pleco). Here’s Love on its genesis:

    I was an exchange student in China and launched the app on Palm in 2001. The signature feature was handwriting recognition (licensed from Motorola) which nobody else had at that point. The problem [for other Chinese dictionaries] was that Palm didn’t have a Chinese font built-in, it did not in fact have Unicode support [or other Chinese text encodings]…you could only get Chinese working on it all through a hack. So having it all in one place, no extra setup needed, no buying licenses to three different $30 apps to get it working, that was kind of the key part of it.

    The one other thing we had besides the handwriting and Chinese support was that we exclusively licensed the Pocket Oxford Chinese dictionary…[everyone else used] CEDICT which had been less exhaustively edited and had no parts of speech or example sentence.

    What stands out to me about Love’s approach was that from day one his differentiation was not based on design, ease-of-use, or some other attribute we usually glorify in developers. Rather, he focused on decidedly less sexy things like licensing. Sure, licensing is particularly pertinent to a dictionary app, but the broader point is that Love’s sustainable differentiation was not about his own code. Sustainable differentiation never is.

    I decided to do the iOS app pretty much as soon as Apple announced the app store…but I was in the middle of a pretty ambitious update for Palm and Windows Mobile, so we were pretty late and there were a bunch of other dictionaries on iOS [by December 2009, when Pleco for iOS launched].

    Love noted that although Pleco was quite late – there were multiple Chinese dictionary apps in the store – they were fortunate that Apple had just started allowing free apps to offer in-app purchases. So, even though Pleco had always been a paid download on Palm, Love immediately took advantage of the new business model:

    Our initial plan in iOS had been to have some sort of free lite app, some sort of slightly nicer paid app with a minimum set of features, and then you could buy other stuff as add-ons. Then in October 2009 Apple announced they were lifting the ban on free apps having in-app purchase so immediately we retooled the whole thing to be free with in-app purchases.

    Love thinks the fact he started from day one with the new business model in mind gave him a competitive advantage to the dictionaries already in the store, but I think he sells himself short; after all, it’s been five years and only now are most independent developers starting to realize that free with in-app purchase is the only viable monetization model. To put it another way, Love differentiated himself again by being a student not just of APIs and frameworks, but of business models as well. More from Love:

    Unlike others, our free app had not only CC-CEDICT (the evolution of the aforementioned CEDICT), we actually licensed another Chinese-English dictionary which we called the PLC dictionary and offered that in our free app and we thought it would be a nice differentiator compared to all of the CC-CEDICT apps because it had sample sentences and other nice things that they didn’t have.

    This point blew me away. Love invested real money into differentiating his free app (Love still had the great handwriting engine, but iOS’s built-in handwriting – while hugely inferior – had lessened that advantage). Love was confident that after he won in free, he could make up the difference with his plethora of paid add-ons, which at this point included not only additional dictionaries – several of them exclusives – but also modules like stroke order diagrams, different fonts, a document reader, and a year later, optical character recognition (OCR).

    At this point I asked him about price. One thing to note about developing on Palm was that significantly higher prices were the norm. Pleco on Palm was available in three different bundles, depending on your choice of dictionary, for prices ranging from $60 to $120. Surely that wasn’t possible on iOS, or was it?

    We launched with a basic bundle for $50, a professional bundle for $100, and a complete bundle for $150. So pretty close to the Palm prices actually.

    But surely prices have fallen, right?

    We actually charge mainly the same prices. Our lowest bundle is $40, but it doesn’t include an additional dictionary now, just features. Some people didn’t like the dictionary we were offering in the basic bundle so we felt it would be more flexible to have a cheaper bundle that didn’t have any dictionaries with the assumption that people could buy whatever dictionary they wanted to go with it. The pricing change helped though – we’re actually netting more off of the basic bundle now than we were when it was $50. The cost reduction actually did us some good.

    Pleco's bundles. Individual features and dictionaries are also sold separately.
    Pleco’s bundles. Individual features and dictionaries are also sold separately.

    Love’s high prices have not hurt sales:

    • Pleco has about 100 times the number of customers as Pleco on Palm/Windows Mobile (thanks to being free)
    • Those free customers convert at about a 5% clip, meaning Love has about 5x more paying customers than he did previously (Palm/Windows Mobile did not have a free edition)
    • Net revenue per customer has been cut by a third, primarily due to significantly higher royalty rates charged by publishers who realized Pleco was cutting into their book sales

    Pleco also has an Android version that makes about a third as much revenue as the iOS version, although Love noted it takes up a lot more than a third of his time. I asked him if it was worth it:

    As a brand expansion, yes. The number of sales we get from the fact that when a typical student starts their Chinese class or exchange program and you get a little sheet, and the sheet says “Here’s some useful Chinese things you should get” and Pleco is one of them, that’s very valuable, and making sure that Pleco is the only app on there and you don’t need to recommend some other app for Android, that’s valuable.

    I think this is a crucial point: Love owns his niche, and he is willing to do whatever is necessary to ensure that remains the case.

    In a follow-up post to the one quoted above Sinclair wrote:

    Arguments that I naively built and marketed an RSS reader in 2014 aren’t relevant to the heart of my article. Any polished app — in any category, with any amount of marketing or promotion — is a lottery. Increasing the marketing budget is just as likely to increase the potential losses as it is to increase potential sales. Each niche is an apple or an orange. It’s all a gamble.1

    Love is testament this is absolutely not true. He has identified a niche – Chinese language learning – and over many years he has worked diligently to be the app for that category. Much of that time has not been spent on development or design. Rather, it’s been spent understanding and listening to customers (which led to the aforementioned bundle change), making business deals with slow-moving publishers, careful consideration around pricing and app store presentation, investments in both free and paid differentiators, and a whole bunch of time spent on an Android app that doesn’t make that much direct money but that marks him as a leader in his space.

    Make no mistake, Love has had his breaks, particularly his having started with favorable licensing terms, but I would ask every indie developer who is bemoaning his or her fate in the app store:

    • Are you serving a niche that has a clear need, an audience that is willing to pay, and that is large enough to sustain your app?
    • Have you developed sustainable differentiation that is more tangible than just look-and-feel?
    • Do you have a fully thought-out monetization model that lets you make a meaningful amount from every customer you serve? If your app is truly differentiated then you need to charge customers accordingly
    • Have you invested just as much if not more effort in non-development functions like making partnerships, licensing, promotion, etc.?
    • Have you made an Android app?

    All of this is table stakes for any developer, indie or not, and as much as I like Sinclair personally, the lessons I draw from his experience is not that the app store is broken, but rather that he built a bad business (particularly in his choice of market). If doing everything I listed doesn’t sound attractive, or realistic, if all you want to do is develop and make something beautiful, then you need to get a job that will pay you to do that. To be an indie is to first and foremost be a businessperson, and what I admire about Love is that he is exactly that. His development skills are a mean, not an end.

    To be clear, Apple could do much more to make things easier for developers of all sizes. Two in particularly would make a big difference:

    • Trials: One of the big advantages Love has in his space is that it is possible for him to offer a highly useful (and differentiated) free app along with a whole slew of paid add-ons. There are other categories, though, where to remove features would render the app useless. These sorts of apps need app-store supported time-limited trials along the lines of the Windows Store:
      The Windows Store lets developers set up time-limited trials of up to 30 days with the click of a button.
      The Windows Store lets developers set up time-limited trials of up to 30 days with the click of a button.

      This would quickly make clear which apps in a given niche were the best, because customers could try them all, and that developer could charge accordingly. Over the long run, different niches would end up with different apps at different prices, with price as a signifier of quality (which, of course, the customer could verify through a trial)

    • Paid Upgrades: The key to any sustainable business, whether it be a restaurant, airline, or app developer, is to make money off of your best customers over time. Apps with a service component, like Evernote, or ones with an ever-increasing array of in-app purchases, like Pleco, do this successfully. Again, though, there are other types of apps that are complete experiences unto themselves. Right now there is little motivation for a developer to invest time in improving their app, because the people who are mostly likely to appreciate those improvements – the current customers – can’t pay. It is true you can release a separate app entirely, but then you lose access to the original app’s data, plus you have no means of communicating with your current customers to let them know why they should update.

    Apple really should care: the iOS ecosystem is one of the iPhone’s biggest differentiators, and absolutely one of the reasons Apple maintains its impressive margins. But independent developers also need to appreciate that the iOS app store, with its minimal barriers to entry and massive consumer audience, requires that they first and foremost be businesspeople.

    Love reminisces:

    I do miss the Palm days. The thing about that is it was much more about writing apps for people like me. I think a lot of people complaining about the state of the app store now are realizing it doesn’t work that way anymore – but in the early days of the iOS app store it did. People on Palm just wanted you to add cool stuff. They wanted more features, they were excited by the same things I was excited by.

    This is the critical point: developers all want to write an app for themselves, which means everyone has. That’s why there is no money to be made in something like an RSS reader. But there are whole swathes of people out there who have really interesting and specific needs – like Chinese language learning – just waiting for someone who can not only develop, but can also do market research, build a business model, and do all the messy stuff upon which true differentiation – and sustainable businesses – are built.2

    1. In a follow-up conversation, Sinclair expounded on this, saying, “The scale of the App Store might lead a newcomer to believe that even a small niche is capable of generating satisfying revenues for a solo developer.” To me this seems to be saying the same thing, but judge for yourself ↩

    2. Note: For this article I also interviewed Elia Freedman, another former Palm developer who has built the best financial calculator on the app store (no, really – look at the reviews). My thanks to him for this time, and definitely check out both his apps (he has a whole suite of calculators), as well as his very thoughtful blog (where he disagrees with me about trials)  ↩

  • Losing My Amazon Religion

    Benedict Evans asks a good question:

    The growth curve is impressive enough, even before you notice that the scale is logarithmic. And to be sure, Amazon has had doubters from the beginning: few gave the company a chance when it started, and even fewer thought it would survive the bursting of the bubble. And yet, today Amazon is the king of e-commerce, at least in the United States, and the clear leader in cloud services, and now they are making a big push into digital content and devices.

    I too was once a skeptic. I remember several years ago, after being invited for final interviews with Amazon, I decided that I wouldn’t take the job even if offered.1 Beyond the fact the retail-focused role wasn’t a great fit, I was also concerned that total compensation at Amazon, at least relative to other established tech companies, is heavily stock-based. At that time the stock was trading at a price-to-earnings ratio of nearly 90, which on the surface seemed unsustainable, and it didn’t seem worth the risk.

    As of today, the stock price has doubled.

    Since that time I’ve come to appreciate what an incredible business Amazon has built, as well as the size of the opportunity. Just about a year ago, when every one was freaking out about Amazon’s earnings (this week’s angst is nothing new), I wrote about Amazon’s Dominant Strategy:

    Jeff Bezos’ critical insight when he founded Amazon was that the Internet allowed a retailer to have both (effectively) infinite selection AND lower prices (because you didn’t need to maintain a limited-in-size-yet-expensive-due-to-location retail space). In other words, Amazon was founded on the premise of there being a dominant strategy: better selection AND better prices – the exact same as Sears.

    And, just like Sears, Amazon has added convenience. No, they haven’t opened retail stores; instead they created the amazing Amazon Prime.

    In a happy coincidence, the same day I posted my piece the aforementioned Benedict Evans posted his own defense of Amazon:

    Amazon is constantly creating new business lines. When they start, like any new business, they’re loss making. But they don’t ‘flip a switch’ to get to profitability – they just grow and execute, like any other business…

    To put this another way, Amazon is LOTS of different startup ecommerce businesses on one platform. All the profits from the ones that work are spent on new, loss-making ones.

    This approach makes sense of the compensation scheme I was nervous about: small autonomous teams have a lot of agency over their own results, even as they all work for a mutually shared outcome, and each team has a part to play. Older groups like books and media are the cash cows, funneling profits to growth engines like clothing or shoes or auto or any of the myriad of businesses under Amazon’s roof, all of them focused on the massive e-commerce opportunity (e-commerce is still only 6% of United States’ retail), and each doing their part to deepen the moat that is Amazon’s scale, logistics network, and multi-sided marketplace of customers, suppliers, and third-party merchants.

    My confidence had been further bolstered by the approach Amazon had taken with Kindle: while their own devices had created the market, Amazon was quick to have a Kindle app immediately available on all platforms. Clearly they understood that e-commerce – and its digital equivalents – was a service business that needed to be in front of as many people as possible; to be overly focused on their own devices would be a mistake.

    I could even see the point of the Kindle Fire tablet; at that point the cheapest iPad was $500, and Android-based tablets were even more expensive. Here came an alternative for half the price, and even in version one the seamless integration of media you owned, were subscribed to, or could purchase was brilliant. Amazon’s investments into digital media were understandable: their e-commerce business was originally built on books, CDs, and DVDs, but all of those were going away in favor of digital alternatives. Worryingly, Amazon was barred from selling said alternatives on iOS devices, so it made sense to offer an iOS alternative with their media stores fully integrated.

    It’s on this point, though, that the Amazon narrative starts to break down, at least for me. See, while Amazon’s revenues keep going upwards, their costs do as well – as, indeed, they always have. Those costs, though, are increasingly not about e-commerce, but rather two areas in particular: devices and video.

    Amazon’s financials are famously opaque, and the investments the company is making in streaming video rights, original programming, and their devices are spread around between Cost of Sales, Fulfillment, and Technology and Content. Complicating matters is that spending for Amazon Web Services falls in the latter bucket as well. Still, in 2013 BTIG estimated that Amazon would spend $500 million that year on video, and FierceOnlineVideo has put this year’s expenditures at nearly $1 billion. Last quarter’s 10-Q noted (emphasis mine):

    The increase in cost of sales in absolute dollars in Q2 2014 and for the six months ended June 30, 2014, compared to the comparable prior year periods, is primarily due to increased product, digital media content, and shipping costs resulting from increased sales, as well as from expansion of digital offerings.

    And, in the earnings call, Amazon’s CFO said spending on original content in particular would keep going up:

    So video content, for example, we’re ramping up the spend from Q2 to Q3 significantly. And so it’ll be also a significant growth year-over-year. Keep in mind we have two types of content. We have licensed content. We also have original content. A lot of you have probably seen a lot of the announcements that we’ve green-lighted a number of pilots. We’re going to be in heavy production in those series that have been green-lit during Q3. We’ve also announced a number of pilots that will be in production on. And so that original content, it’s a portion of our total content, will be over $100 million in Q3.

    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?

    Best I can tell, Amazon’s story goes something like this:

    • Amazon gets or creates exclusive content at considerable cost
    • Customers are attracted to said exclusive content and thus sign up for Amazon Prime
    • Because customers are members of Amazon Prime, they start spending significantly more on e-commerce

    Oh, and since mean ol’ Apple won’t allow Amazon’s digital content to be sold on iOS, Amazon will make devices to better sell said digital content. Which will ultimately accrue to e-commerce. And, profit!

    I suppose this makes a certain kind of sense, but it reeks of what a former manager of mine calls a “double bank shot.” Amazon seems to be arguing that through this rather convoluted chain of events, all of which carry significant challenges and risks that are outside Amazon’s expertise (content creation, ecosystem development, etc.), they will be better placed to increase e-commerce’s share of retail.

    Here’s my question: why not spend all that money – and time and executive attention – on simply growing e-commerce? Instead of pushing for the Prime Rube Goldberg machine, how about simply advertising Prime? And instead of pursuing a separate ecosystem, with all of the challenges and incentive risk that implies, why not focus on both building better apps and on creating partnerships with Apple in particular (who certainly has no intention of competing in e-commerce; Google is obviously much more of a competitor)?2

    Moreover, I’m concerned about the internal incentives that Amazon is creating for itself. Amazon is increasingly competing with its suppliers, particularly in the digital space, and I just noted that potential partners like Apple are instead rivals. More concerning is the effect of devices on the company’s overall strategy. In the Fire phone introduction, Bezos was very clear that any device needed differentiation. His answer was Dynamic Perspective, but when that doesn’t work – spoiler: it doesn’t – the easy fallback is to differentiate on services. This will be particularly tempting given that Amazon is clearly looking to make a profit on each device sale. I can’t overstate what a terrible idea this is; I hate the Fire phone not because it seems to be a terrible product, but rather because I see its very existence, at least in the current incarnation, as actively harmful to Amazon’s core business, which needs to be great on all devices.

    So what exactly is going on? Why is Amazon building vertical devices that don’t fit a horizontal company? Why are they pursuing convoluted double-bank-shot strategies that are extremely expensive and high risk? All of these are much more pressing questions than why Amazon is or isn’t making a paper profit.

    • The first possible explanation is that Amazon’s core e-commerce business is in fact very threatened by the shift to mobile, and they feel they have no choice but to build their own platform with its own lock-in.

      The biggest problem with mobile is that, according to Michael Mace, while PC shoppers convert at about a 3% rate, mobile shoppers are a mere 1%. That’s a massive drop-off. Moreover, the rise of apps as a primary channel makes vertical and brand-specific retailers just as accessible and visible as Amazon (in contrast, few people go directly to specific web sites).

      In addition, the sort of shopping experience that Amazon is particularly strong in – extensive research, reviews, etc. – simply doesn’t work as well on mobile. What does work well are things like flash sales or direct marketing pitches. These new marketing and conversion channels threaten to break into Amazon’s share of wallet: you may not necessarily have bought an item purchased in a flash sale from Amazon, but you do have that much less to spend for the rest of the month.

    • At the other extreme, it’s possible that Bezos simply wants to rule the world, at least when it comes to buying and selling anything that can be bought or sold. It’s certainly hard to doubt the guy!

      Still, the Fire phone in particular gives me pause. Beyond the incentive issues I noted above, rumor has it that Bezos was very involved in the Fire phone’s development process, and that he fashions himself as a product guy. The way-too-long introductory keynote certainly hinted at a certain grandiosity about the phone and its development process.

      The problem, though, is that the phone is simply not good. Bezos is clearly an operational and organizational genius, but there is nothing in Amazon’s history to suggest he is a product person.3

    These are two rather unappealing possibilities from an investor perspective: a rational response to a mortal threat, or an irrational belief Amazon can seize a seemingly non-existent opportunity. And still the question remains: what’s wrong with simply focusing on the massive e-commerce opportunity? Again, I don’t mind that Amazon doesn’t make profits; I love the way they are constantly building new businesses from scratch. But why can’t those new businesses leverage Amazon’s strengths instead of accentuating its weaknesses?

    Or, perhaps there remains truths I still do not fully understand. I was wrong about Amazon in 2010, but my error was one of depth; once I took the time to understand the company, I became a believer. This time though, feels different: I want to give the benefit of the doubt, but I don’t believe in double bank shots or blind faith.

    (Check back in 2018 when I write about how I was wrong).

    Update May 2015: I was wrong, and it only took me a year: see The AWS IPO

    1. I try to make decisions before I have to ↩

    2. To be clear, this ship has long since sailed; I’m referring to what Amazon could have done instead ↩

    3. An earlier version suggested that no one at the company was a product person; that is obviously not true and was unfair. What I meant to say is that Amazon’s specialty is not finished physical products; rather, they are a services company that improves iteratively. There is nothing wrong with this (it’s something that Apple, for example, is terrible at)  ↩

  • Big Blue and Apple’s Soul

    I hope you’ll forgive my writing about week-old news,1 but I find it striking to compare the paucity of words written about Apple’s partnership with IBM, at least relative to what was written when Apple acquired Beats. After all, the IBM partnership is a much bigger deal.

    It certainly seems that Tim Cook feels the same. On yesterday’s earnings call Cook spent, by my count, five times the amount of time talking about IBM than he did Beats2, much of it unprompted by questions. The key paragraph was this one:

    We also are in the — virtually all Fortune 500 companies, we are in 99% of them to be exact and 93% of the Global 500…[but] the penetration in business is low. It’s only 20%. And to put that in some kind of context, if you looked at penetration of notebooks in business, it would be over 60%. And so we think that there is a substantial upside in business. And this was one of the thinkings behind the partnership with IBM that we announced last week. We think that the core thing that unleashes this is a better go to market, which IBM clearly brings to the table

    In other words, lots of enterprises have dabbled with iOS, but Apple doesn’t have an effective way to sell more.

    Apple is in a fascinating position when it comes to the enterprise: it turns out that iOS is the best choice for enterprise from a product perspective.3 Blackberry has the integration, but everything else is obsolete; Android has less-effective device management built in and suffers from the usual Android fragmentation issues (which are improving),4 while Windows Phone, shockingly, has only in the last update added basics such as VPN support.5

    However, especially in the enterprise, product is not enough; in fact, very few devices are sold to enterprises as-is. Rather, they are delivered as part of “solutions”, the total cost of which is multiples greater than the underlying device. These “solutions” include things like custom software, implementation, training, consulting, and service contracts. Each of these pieces is fully customizable and negotiable for each enterprise customer, and it is for this you need a massive sales force. Ultimately, no matter how good of a product the iPhone may be, without the sales force and willingness to build “solutions” – the right go-to-market, in Cook’s words – Apple was never going to fully realize the enterprise opportunity.

    The problem is that building said sales force is massively expensive, and not just in dollars: it has a big impact on a company’s culture.6 As Jobs wrote in his biography:

    The company starts valuing the great salesmen, because they’re the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company. John Akers at IBM was a smart, eloquent, fantastic salesperson, but he didn’t know anything about product. The same thing happened at Xerox. When the sales guys run the company, the product guys don’t matter as much, and a lot of them just turn off. It happened at Apple when Sculley came in, which was my fault, and it happened when [Steve] Ballmer took over at Microsoft. Apple was lucky and it rebounded, but I don’t think anything will change at Microsoft as long as Ballmer is running it.

    To Jobs this was anathema. If Jobs was adamant about anything it was that Apple always focus on creating the best possible product. If that meant forgoing a massively lucrative enterprise market, then so be it.

    That, though, is what makes this partnership so brilliant for Apple. By offloading everything onto IBM – who is playing the role of what’s called a “Value-added reseller” (VAR) – Apple can now sell into the enterprise without building the sales capability that in the long run would be poisonous to the product-centric mindset that is their ultimate differentiator.

    To be clear, while I’ve been writing from Apple’s perspective, this is an even bigger deal for IBM. As I just noted, the total cost of a VAR “solution” is usually multiples greater than the cost of the underlying device or software; fully integrating a device into an enterprise is a messy business, but dealing with messiness is not only worth a lot of money, it also entails building deep and ongoing relationships with the company you are servicing. In other words, when it comes to the sort of enterprise deals that IBM is going to put together, iOS devices are much closer to commodities; it is IBM that will provide the most value from the enterprise’s perspective. This is a risk for Apple: it’s certainly possible to envision a scenario where IBM switches out iOS for another platform, and there will be nothing Apple can really do about that.

    I’m sure, though, that Apple is well aware of this and counts it as a price they are willing to pay7 (in addition to the commission they’ll likely pay IBM on each iPhone or iPad, in case it’s not clear who will be the lead in this partnership). Apple is getting access to a massive market that had long been off-limits, and they are doing so without giving up their product-centric soul.

    1. I was on vacation at the time ↩

    2. 777 words versus 174 ↩

    3. It’s hard to overstate what a change this is; Apple has always prioritized the user experience over features, but in a market where the buyer is not the user, a user experience advantage is worthless. That’s what Steve Jobs was driving at in this classic clip ↩

    4. Note: I originally said Android lacked device management completely, which was not right. I apologize for the error ↩

    5. There is no greater example of Microsoft’s misplaced hubris than in launching Windows Phone without any enterprise features in the belief they could knock the iPhone off in the consumer market. Remember this? ↩

    6. To be clear, I have no problem with sales forces or their effect on culture – they are critical for enterprise businesses. The issue is when you try to do both enterprise and consumer ↩

    7. This is also an interesting contrast to Apple and Google Maps; in this case, Apple is prioritizing their culture over control. When it came to maps Apple prioritized control over the product ↩

  • It’s Time to Split Up Microsoft

    To understand why so many serious Microsoft observers were encouraged by Satya Nadella’s week-ago memo Bold Ambition and Our Core,1 it’s useful to go back 10 years and read Steve Ballmer’s 2004 memo Our Path Forward. It was around this time that cracks were first starting to appear in the Microsoft machine: the stock had been stagnant for going on four years, Windows XP was besieged by a security crisis, and Microsoft was about to announce the reboot of Windows Vista née Longhorn. Meanwhile, the iPod was exploding, and Google’s stock price had quadrupled since its IPO earlier that year on the back of its 85% share of search.

    In response, Ballmer said that Microsoft needed to innovate:

    The key to our growth is innovation. Microsoft was built on innovation, has thrived on innovation, and its future depends on innovation. We are filing for over 2,000 patents a year for new technologies, and we see that number increasing. We lead in innovation in most areas where we compete, and where we do lag – like search and online music distribution – rest assured that the race to innovate has just begun and we will pull ahead. Our innovation pipeline is strong, and these innovations will lead to revenue growth from market expansion, share growth, new scenarios, value-add through services (alone and in partnership with network operators), and using software to open up new areas. Our focus areas are:

    Ballmer then listed 10 different areas of “focus”, the vast majority of which were themselves so broad as to be meaningless. More disturbing than Ballmer’s abuse of the word focus, though was the fact that mobile barely figured in those ten areas. Here is the one mention:

    Non-PC Consumer Electronics: The opportunity is virtually unlimited to integrate the richness and intelligence of the PC world with everyday devices such as mobile phones, handheld devices, home entertainment and TV. At the center of our efforts are products such as Pocket PC and Smartphone, Portable Media Center, MSTV, MSN TV, Windows Automotive, the Windows Media Center Extender, and other electronic devices built on Windows CE and Windows XP Embedded.

    Even here, mobile phones are only useful insomuch as they “integrate the richness and intelligence of the PC world.” Ballmer and Microsoft simply could not break free of their Windows-first mindset, and while it would be another 3 years before the iPhone arrived, it was this memo and what it represented that marked the beginning of Microsoft’s decline.

    The Power of Monopoly

    It’s easy to dump on Microsoft now, but even easier to forget just how impressive and seemingly impregnable their core business once was.2 I have written multiple times that tech companies ought to be either vertically/platform focused, with software and services that differentiate hardware (like Apple), or horizontally/service focused, with the goal of offering superior software and services on all devices (like Google and Facebook). To try and do both, as Ballmer explicitly did with his “Devices and Services” strategy, is to do neither well: differentiating your devices by definition means offering an inferior service on other platforms; offering superior services everywhere means commoditizing your own devices. “Devices and Services” was nonsense.

    Still, it’s understandable why Ballmer thought differently: Microsoft in the 90s managed to do exactly what I just said was impossible. Because Windows was a monopoly, making their software and services work everywhere meant making them work on Windows. There was no choice between horizontal and vertical, and the company profited fabulously. Over time Microsoft added a server component to this virtuous cycle: people depended on Office, which ran on Windows, and was enhanced by services like Exchange Server, Sharepoint Server, SQL Server, etc. It didn’t matter that Office for Mac kind of stunk; that product mostly existed because of a (failed) attempt to fend off antitrust watchdogs, and it made a ton of money to boot.

    This cycle is why breaking up Microsoft, as Thomas Penfield Jackson originally ruled in 2000, would have been truly destructive to shareholder value. The company was strong because its products built on each other, and at the root of that strength was the Windows monopoly.

    Microsoft’s Opportunity

    Fast forward to last Monday, and the opening of Microsoft’s Worldwide Partner Conference. COO Kevin Turner put up this slide:

    Kevin Turner's slide at WPC. Curiously, and in contrast to the rest of WPC, Microsoft has not made Turner's keynote available publicly.
    Kevin Turner’s slide at WPC. Curiously, and in contrast to the rest of WPC, Microsoft has not made Turner’s keynote available publicly.

    A monopoly that is not.

    My first reaction to this slide was quite positive, but the more I’ve thought about it, the more I think the slide represents Microsoft’s biggest issue moving forward. It’s not that their devices share is at 14% – that’s just a fact, and I applaud the honesty; rather, I’m bothered by the phrase “We have a big opportunity.” For Turner, the opportunity is in growing that 14%. As quoted by Gregg Keizer:

    We want to go from 14% to 18%, from 18% to 25%, from 25% to 30%. That’s the beauty of this model … [the opportunity] is much bigger than anything we’ve had in the past.

    Turner is still talking about devices, and it’s really too bad, because the real opportunity is in the 86%. Microsoft already has software and services like Skype, Bing, and OneDrive that work right now on 100% of that pie; it’s only a matter of time until the same can be said for Office. That is the opportunity; to even think about the share of devices, particularly at the executive level, is to handicap Microsoft’s greatest chance for growth before it even truly gets started. It’s not just that Windows is no longer Office’s only market that matters; it’s that Windows and Microsoft’s devices focus is actively damaging Office’s prospects.

    Nadella’s Memo

    And so we are back to Nadella’s memo. In contrast to Ballmer’s anything-but-“focus,” Nadella was quite specific:

    More recently, we have described ourselves as a “devices and services” company. While the devices and services description was helpful in starting our transformation, we now need to hone in on our unique strategy.

    At our core, Microsoft is the productivity and platform company for the mobile-first and cloud-first world. We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more.

    Nadella was clear that focusing on “every person” meant focusing on every device as well:

    [Microsoft’s productivity apps] will be built for other ecosystems so as people move from device to device, so will their content and the richness of their services – it’s one way we keep people, not devices, at the center.

    This is exactly right. Nadella is making a choice here: productivity as a single unifying principle, and by extension, services based on people, not differentiation based on devices. Moreover, it’s a far more difficult and brave choice – obvious though it may be – than outside observers could likely understand. It was only a little over a year ago that Ballmer declared, “Nothing is more important at Microsoft than Windows.”

    Last week, Nadella said “No.”

    The Power of Culture

    The problem, though, was elucidated by Nadella himself in an interview with The Verge:

    At the end of the day, look, any strategy gets eaten for lunch if you don’t have a culture that’s also changing.

    Nadella is referencing the famous Peter Drucker3 quote “Culture eats strategy over breakfast”; unfortunately, as we have already seen with Kevin Turner’s presentation, that is almost certainly what will happen at Microsoft. For all the talk of moving beyond Windows (and Windows Phone), I am deeply skeptical that Microsoft can truly pursue its potential as a software and services company as long as Windows is around. Culture is developed over years, and for decades everything at Microsoft was about Windows. Read again Ballmer’s statement:

    Nothing is more important at Microsoft than Windows

    The problem for Nadella and Microsoft is that ultimately this wasn’t a declaration of strategy; it was a declaration of fact, and facts don’t change by fiat.

    Understanding Nokia

    This is how one can really understand why Ballmer – over the objection of Nadella, among others – made the disastrously stupid decision to buy Nokia. We now know for a fact that my speculation at the time that Nokia was about to introduce Android phones was spot-on, and the terms of the deal suggest that Nokia was having financial difficulties as well; if Microsoft would have lost Nokia, they would have lost Windows Phone, and Ballmer saw that as a mortal threat. Never mind that Windows Phone is for all-intents-and-purposes already dead; the thing about culture is that it not only eats strategy, it washes it down with a potent mixture of selective facts and undue optimism.

    In so doing, though, Ballmer dramatically compounded his 2004 error. When Nadella took over earlier this year Microsoft had not only missed the mobile boat, he was now saddled with a $7.2 billion dollar anchor and 34,000 new employees. That’s the thing about last week’s layoffs: even after shedding 18,000 employees Microsoft will still be about 16% bigger than they were before the acquisition, and still tightly bound to a devices group that is working at diametrically opposed goals from the software and services businesses that are Microsoft’s future.

    The Solution

    It was just about year ago that I wrote in Services, Not Devices:

    The truth is that Microsoft is wrapping itself around an axle of it’s own creation. The solution to the secular collapse of the PC market is not to seek to prop up Windows and force an integrated solution that no one is asking for; rather, the goal should be the exact opposite. Maximum effort should be focused on making Office, Server, and all the other products less subservient to Windows and more in line with consumer needs and the reality of computing in 2013…

    As for Windows, let it focus on solidifying Microsoft’s hold on the enterprise (it’s here the need to fight the iPad is most acute), with a nice spillover into Home PCs and gaming, and accept the fact Windows was only ever relevant in the consumer market because nobody got fired for buying IBM.

    In other words, keep Windows as a cash cow, but be explicit that the future was in cross-platform services. Unfortunately, this was before the Nokia deal. The effects of that deal – and understanding why it was made – have convinced me that Microsoft cannot truly reach its potential as a services company as long as Windows and the entire devices business is in tow.

    In short, it’s time to break Microsoft up.

    In 2000, Windows, Office, and Server were a virtuous cycle. Today, Windows and the entire devices business is nothing but a tax. Microsoft is a company that is meant to serve the entire market, and the way to do that is through services on every device. It’s all fine and well to say that you will treat devices equally, but given Microsoft’s history – and the power of culture – I just don’t believe it’s possible.

    I would create two companies: the devices side, which includes Windows, Windows Phone, and Xbox, and let them do the best they can to grow that 14%. Heck, make Kevin Turner the CEO. Windows profits will keep the company going for quite a while, and who knows, maybe they’ll nail what is next.4

    The other company, the interesting company, is the services side – the productivity side, to use Nadella’s descriptor. This company would be built around Office, Azure, and Microsoft’s consumer web services including Bing5, Skype and OneDrive.6 These products don’t need Windows; they need permission to be the best regardless of device.

    Of course, the Windows company does need Office, and Azure, and all the other Microsoft growth engines, and this cleavage would likely hasten Windows’ decline. But that’s exactly why a split needs to happen: anything Office or Azure or Microsoft’s other services do to prop up Windows – that focuses on that 14% – by definition limits Microsoft’s opportunity to address the far bigger part of the pie that ought to be the future.

    1. I’m very puzzled by the URL here: It is “http://www.microsoft.com/en-us/news/ceo/index.html”, which means this email is the de facto home page for Satya Nadella. I presume that won’t be the case forever, but how then will you find this note? ↩

    2. To be clear, from a revenue and profit perspective, the business still is incredibly impressive. Microsoft still makes more revenue and profits than Google. Revenue in particular, though, is trending in the wrong direction, and Microsoft’s decline in relevancy, particularly in the consumer market, is large ↩

    3. Supposedly ↩

    4. One more thing: this devices company would not have killed Nokia’s feature phone business. The “tax” works in both directions ↩

    5. Don’t laugh; the thing with search is that when you reach the tipping point, it can become very profitable very quickly, and Bing is getting closer ↩

    6. Probably the toughest division to split would be the on-premise server groups. On one hand, they make Office go; on the other hand, their incentives and sales patterns aren’t perfectly aligned with Azure and Office 365. I could see arguments on both sides, but would tend towards leaving them with the new Services Microsoft ↩

  • Site Note: Vacation and the Daily Update

    Just a quick note that I am on vacation this week and do not plan on posting an article (although I certainly picked quite the week to be gone!).

    The Daily Update will continue but instead of analysis of recent news, I have written brief overviews of the Strengths, Weaknesses, Opportunities, and Threats (SWOT) of five of the most important companies in tech (all links members-only):

    These will be delivered to members as usual by email, private RSS, or via links on the right side of this page (bottom on mobile).

    To become a member of Stratechery go here; to read through the archive of past Daily Updates, go here (members-only).

    My thanks to all of Stratechery’s readers and especially members for your support. Look for new content starting on Monday, July 21.

  • Smartphone Truths and Samsung’s Inevitable Decline

    For me, anyway, the most surprising thing about Samsung’s disappointing earnings was just how surprised many folks seemed to be. The smartphone market is a massive one, but also rather predictable if you keep just a few key things in mind:

    • Everyone will own a smartphone – I don’t think this is controversial, but it’s important, as there are a few implications of this fact that are perhaps non-obvious.

    • The majority of buyers will prioritize price – The implication of a phone being a need and not a want is massive downward pressure on the average selling price for two reasons:

      • Low income buyers who might normally not buy consumer electronics or other computing devices will be a part of the phone market, and will buy low-priced models by necessity
      • Higher income buyers who are uninterested in other consumer electronics or other computing devices will be a part of the market, and will buy the low-priced models by choice

      The net effect is that the average selling price for a phone will be low and always decreasing, while the high-end market will be relatively small in percentage terms.

    • Absolute numbers matter more than percentages – While it’s natural to talk about market size as a percentage, the absolute size is just as important. In the case of Apple, for example, the fact they “only” had 15.5% percent of the market in 2013 is less important for understanding the iPhone’s viability than is the fact they sold 153.4 million iPhones. That is more than enough to support the iOS ecosystem, percentages be damned.

    • There will always be a high end segment – The very reason why everyone will buy a phone (always with you, access to information, communication) are the same reasons there will always be a segment of the population willing to pay for a superior product. The analogy to cars is perhaps overdone, but for good reason: it makes a lot of sense. Like cars, phones are about appearance, performance, and experience; both are status symbols; and (in most parts of the world) both are necessities.

    • The high end isn’t that expensive on an absolute basis – Where the car analogy breaks down is absolute prices. The cheapest Mercedes-Benz you can buy (in the U.S.) is a surprisingly accessible $29,900. That, though, is 46x as expensive as an iPhone 5S. Sure, an iPhone 5S is a bit more than 3x as expensive as a Moto G, but the absolute price difference is only about $500; a car 1/3 the price of that Mercedes would have an absolute price difference of $20,000.

    • Low end quality is improving rapidly – That Moto G is a very nice phone that absolutely does the job for most people. It’s also not that big a deal, particularly in Asia where there are even cheaper and more capable phones available based on a SoC from MediaTek. Moreover, the entire supply chain continues to improve and bring down prices on every part of a smartphone, improving the quality of even the most inexpensive products.

    • Fleshed-out App Stores are table stakes – By fleshed-out app stores, I mean the iOS App Store and Android’s Play Store, full stop. It’s nice that Windows Phone and the Amazon Fire app stores are getting some big names, but the problem with an 80/20 approach (in this case, shooting for 20% of apps that satisfy 80% of needs) is that everyone differs on the remaining 20%, and it’s usually that 20% that is the most important for any one user. Of course, some users don’t really care, but those are likely super low-end customers anyway, which aren’t great for margins or your ecosystem.

    • Carriers matter, at least for the high end – Many customers, particularly in developed markets, are loyal to their carriers and only choose phones which are available on their preferred network. On the flipside, markets in which people move freely between carriers (or use dual-SIMs) are usually lower-income markets with smaller high end segments.

    • Screen size matters – The one physical characteristic that seems to impact phone selection is screen size. While the large screen phones are a relatively low percentage of the total phone market, they are a much higher percentage of the high end.

    • Software Matters – For years analysts treated all computers the same, regardless of operating system, and too many do the same thing for phones. I personally find this absolutely baffling; you cannot do any serious sort of analysis about Apple specifically without appreciating how they use software to differentiate their hardware. The fact is that many people buy iPhones (and Macs) because of the operating system that they run; moreover, that operating system only runs on products made by Apple. Not grokking this fact is at the root of almost all of the Apple-is-doomed narrative (which, by the way, is hardly new).

      Software-based differentiation extends to apps. While a fully-fleshed out app store is table-stakes, for the high end buyer app quality matters as well, and here iOS remains far ahead of Android. I suspect this is for three reasons:

      1. The App Store still monetizes better, especially in non-game categories
      2. iOS is easier to develop for due to decreased fragmentation
      3. Most developers and designers with the aptitude to create great apps are more likely to use iOS personally

      None of these factors are likely to go away, even as Android catches up with game-based in-app purchases and as iOS increases in screen size complexity.

    It is this final point that makes the Samsung news so unsurprising. Samsung had built up a healthy high-end business by:

    • Being available on nearly every carrier
    • Pioneering the large-screen segment
    • Producing hardware that was meaningfully superior to low-end offerings

    All three of these factors either have or are in the process of disappearing:

    • After a two-year lull, Apple has greatly expanded iPhone availability worldwide
    • As noted above, the gap between low and high-end hardware is disappearing
    • Multiple manufacturers have moved into the large-screen segment, with the iPhone coming soon

    In China Samsung has another problem: their brand and distribution channel, which they have spent billions building, is no match for Xiaomi’s star power which lets the startup sell phones at cost without any additional marketing or channel expenses. It’s not helpful to (rightfully) say this issue is primarily limited to China (I’m more skeptical of Xiaomi’s prospects elsewhere, but bullish on Lenovo) because the Chinese market is the largest market in the world.

    Ultimately, though, Samsung’s fundamental problem is that they have no software-based differentiation, which means in the long run all they can do is compete on price. Perhaps they should ask HP or Dell how that goes.

    In fact, it turns out that smartphones really are just like PCs: it’s the hardware maker with its own operating system that is dominating profits, while everyone else eats themselves alive to the benefit of their software master.

    Previous articles on Samsung’s troubles:

  • Happy Independence Day Mr. Glass

    Blessed with the sort of love him or hate him reputation reserved for the truly popular, Bill Simmons has received a lot of criticism from NBA fans for his propensity to act as the Body Language Doctor: he will make grand pronouncements about players or teams based on nothing more than a player or coach’s demeanor on the floor or in a press conference.

    Still, I can sympathize with Simmons: it’s easy to give in to a similar sort of temptation when you read things like this New York Times article about Ira Glass and This American Life leaving Public Radio International:

    On July 1, “This American Life” became independent, leaving its distributor of 17 years, Public Radio International, or PRI. That change is partly technical. The program is no longer delivered to local stations through public radio’s satellite system, but instead over the Internet through the online platform PRX, the Public Radio Exchange.

    But the big impact is financial. Gone are a distributor’s financial guarantees, which in the case of “This American Life,” reached seven figures. Instead, Mr. Glass will now be responsible for the show’s marketing and distribution, as well as for finding corporate sponsors. It’s the equivalent of Radiohead’s releasing its own album “In Rainbows,” or Louis C. K.’s selling his own stand-up special — except all the time, for every show. It’s the kind of move that can signal radical changes in the public radio firmament, with National Public Radio and other distributors wondering who, if anyone, may follow suit, and whether Mr. Glass will return if he fails.

    “You take on the risk if you have to do the marketing,” said Laura Walker, president and executive chief officer of New York Public Radio, which operates WNYC. “I don’t think it’s a slam-dunk way of making money. You’ve got to put in a lot of effort and do the work yourself.”

    Set aside the implications for Glass and This American Life for just a moment: what is striking about the article, and this section in particular, is that there is zero discussion about upside. The “big” financial impact is the foregoing of financial guarantees, and questions are raised about what happens if Glass fails – but not if he succeeds. There is concern that Glass’s move towards independence is not a “slam-dunk way of making money.”

    To be fair, this is only one article, but the reason the body language doctor angle is so tantalizing is that this approach seems very representative of traditional journalism’s general discomfort with the Internet. When your world is collapsing it’s awfully easy to see only the downside, and to wish that things like disruption did not exist.

    So let me provide a counter-narrative, and re-write the lede to this story:

    On July 1, just days before the country he chronicles marks Independence Day, Ira Glass of This American Life celebrated his own independence, leaving his distributor of 17 years, Public Radio International, or PRI. That change is partly technical. The program is no longer delivered to local stations through public radio’s satellite system, but instead over the Internet through the online platform PRX, the Public Radio Exchange.

    Of course This American Life is no stranger to Internet distribution; while 2.1 million people listen to the show live on the radio, another million download the podcast, making it the most popular show on Apple’s iTunes. In fact, it was Mr. Glass’s ability to connect directly with his show’s listeners that made an intermediary like PRI redundant.

    To be sure, Mr. Glass is taking a risk by abandoning a distributor’s financial guarantees, which in the case of “This American Life,” reached seven figures. Instead, Mr. Glass will now be responsible for the show’s marketing and distribution, as well as for finding corporate sponsors. The upside, however, is enormous. The cost of a financial guarantee is limited upside – that is why distributors take on that risk – but by taking control of distribution Mr. Glass is reserving that upside for himself.

    “The entity with the most to lose in this move is not This American Life,” said Ben Thompson, who has written frequently about the impact of the Internet on journalism at his blog Stratechery. “Rather, once other radio personalities realize that the Internet has made distributors redundant a lot more people are going to question why they don’t take control of their own destinies.”

    The clear winners, though, are consumers: Mr. Glass has marked the occasion by releasing a new podcast called Serial, and it will be available to everyone worldwide, no distribution deal needed.

    Happy Independence Day to Ira Glass.

    And, dear readers, Happy Independence Day to you as well, both you in the U.S. actually celebrating the holiday, and also everyone around the world who I can reach with ease, no distributor needed.

  • Additional Thoughts on iWatch and Android Wear

    A few points of follow-up on last week’s piece Android Where?:

    So What About iWatch?

    I only mentioned the iWatch tangentially in last week’s piece, which is just as well, for it gives me an opportunity to link favorably to this piece on Techpinions by industry veteran Tim Bajarin about the (alleged) iWatch:

    I actually think the ID aspect of any wearable Apple brings out is probably central to its future functionality. This is speculative on my part but, after using the Disney band for seven days and seeing its incredible functionality, Apple has to be crazy not to make this part of any of their wearables. The ramifications for Apple’s future with this one ID implementation alone could make it a huge hit. Imagine going into a Starbucks and just touching your iWatch or iBand to the terminal, entering a PIN number and it is charged to your Apple account. Or to enter your house, you just touch the Apple wearable and enter a PIN number and your are in. Yes, you can do this with an iPhone now but that means taking it out of your pocket or purse and it is only single authentication at present. In a wearable, it is much easier to use for entering the home and for all types of interactions and transactions. Its convenience factor would be very compelling. I believe something like this would be very “sticky” and keep users of these tied closer to Apple’s ecosystem…

    I believe when and if Apple does launch an iWatch or iBand or what ever form of wearables they bring to market, they will initially lead with the health and home automation apps first and over time add the ID features. As you can imagine, using an iWatch or iBand for ID that can be used to do transactions, lock doors and even handle proximity functions could be controversial without them first convincing people they can trust them even more than they already do today. That could take some time.

    I agree almost completely with his piece, and encourage you to read the whole thing. In fact, it’s exactly what I was driving at in Android Where? when I said:

    I question, though, if Now will turn out to be as meaningful to most people as Google thinks it will be. In other words, how many people actually want a personal digital assistant? There is an alternative view of computers in which they are more akin to a tool, something you pick up and use to do a job, and then set down when you are done with it. To be sure, that tool is incredibly powerful and capable of doing a great number of jobs, but it still operates in service of something outside of computers…A digital assistant, on the other hand, is simply a more efficient way of interacting with your computer – or your computer interacting with you – and I question how much that vision that will ultimately resonate with people.

    The potential problem with Android Wear I see is its focus on being a conduit for your phone – a more efficient distraction from the real world, as it were. I suspect the iWatch will go in the opposite direction: it will be a means of pulling the real world into your phone (think sensors) as well as a means of projecting your phone out (think payments, proximity, etc.)

    Interestingly, neither of these use cases necessarily even need a screen. And, if that’s not a requirement, the range of possible objects increases exponentially. It could be a ring, or a bracelet, or a clip, and so on – or all of the above. It would also be great for battery life, and for price (touch screens are the most expensive component in phones and tablets). Remember the Wall Street Journal article from a week-and-a-half ago:

    Apple is planning multiple versions of a smartwatch—dubbed the iWatch in the media—later this year, according to people familiar with the matter.

    One more thing: a portfolio of wearables certainly would explain hiring someone like former Yves Saint Laurent CEO Paul Deneve as head of special projects. Regardless, I think it’s very safe to say whatever Apple releases will look nothing like the devices shown by Google last week.

    Android Wear/TV Can’t be Customized

    One interesting detail about Android Wear (and Android TV) is that Google is prohibiting OEM’s from customizing the look-and-feel. From ArsTechnica:

    One thing about both of them sticks out: their software behaves pretty much the same way no matter which device you have. There are small differences that Google has outlined here, but interacting with each watch is exactly the same, and digging down into the settings shows that they’re both running the exact same Android versions and build numbers. This would be unusual for Android phones or tablets, which generally come with OEM-controlled UI skins, hardware and software flourishes, and pre-installed apps.

    Talking with Google engineering director David Burke confirmed that all of the new Android initiatives announced at the keynote this week—Android Wear, Android Auto, and Android TV—will have user interfaces and underlying software that is controlled by Google, not by the OEMs.

    “The UI is more part of the product in this case,” Burke said to Ars of Android TV in particular. “We want to just have a very consistent user experience, so if you have one TV in one room and another TV in another room and they both say Android TV, we want them to work the same and look the same… The device manufacturers can brand it, and they might have services that they want to include with it, but otherwise it should be the same.”

    So here is my question: if “the UI is more part of the product” when it comes to Android Wear devices, does that mean the UI is not part of the product when it comes to Android phones?

    Obviously that is not the case in a strict sense – UI is incredibly important in a phone – but looked at broadly Burke’s statement does have a grain of truth. The fact Google does not lock down the UI for Android on phones is not because they don’t think it is important, but rather that the context in which Android was launched was a far different one. As I wrote after last year’s Google I/O, Android was originally developed not as an iPhone alternative, but as a Windows Mobile alternative. Google wanted to ensure that Microsoft did not dominate mobile in the same way they dominated the desktop.

    To that end, they needed to have a “better” offering than Microsoft, where by better I mean an offering that was more appealing to OEMs (remember, back then Microsoft was using their PC business model for mobile – OEMs were their customers). Part of this was “free,” but part of it also was the promise that OEM’s could create unique experiences. Microsoft had been seeking to lock down PC Windows for years at this point, and had taken a much stricter approach to Windows Mobile.

    What’s interesting, of course, is how that last sentence perfectly describes Google’s approach to Android and Android Wear. Increasingly locked down, and, now that they are dominant, their new platform can’t be customized at all.

    (As an aside, while I have said this multiple times, it’s worth repeating: Android was a strategic masterstroke. It’s not just that Google now controls the platform on the vast majority of the user’s phones and all the power and data that come with that, but also that mobile’s emphasis on apps over the browser would have severely magnified Microsoft’s chokehold had they been as dominant as Google feared.)

    Parenthood iPhone Ad

    Back to the iWatch, there is a great new iPhone ad by Apple. From Recode:

    Today is the seventh anniversary of the very first iPhone release and Apple is celebrating it with a new ad touting the device’s role in the Internet of Things and its ability to support parenting and foster family interaction. Showcased in the spot are all manner of family-friendly peripherals: the WiThings baby monitor, the Belkin WeMo plug, the ProScope Micro Mobile microscope, the Tractive GPS dog collar, the Kinsa thermometer and Parrot’s Flower Power wireless sensor for plants, as well as a bunch of related apps.

    A few weeks back in my Daily Update (members only) I wrote that Apple’s new fitness ad, while being nominally about the iPhone, probably ought to be viewed as the beginning of the iWatch marketing campaign:

    As countless commentators have noted, one of the central challenges of the alleged iWatch is that it’s not super clear how big of a need there is among the general population. What, though, is advertising? In many respects the best sort of ads make you aware of a need you didn’t realize you had. This sort of effect, though, is not achieved with a one-off spot or campaign. Rather, it’s a long slog that only sees results over time.

    To put it more bluntly, it’s very possible that we just saw the first iWatch commercial. Oh sure, there is no iWatch to be seen, and there are benefits depicted in the commercial that accrue to the iPhone today, but I wouldn’t be surprised if this is Apple starting to set the table amongst the broader consumer market.

    To my mind this new ad confirms that thesis. Apple is working to set the expectation that your iPhone is better with additional peripherals, and golly, wouldn’t it be something if Apple had a peripheral of their own to sell you?

    Beyond that, as a parent I really did enjoy this ad, and felt it hit the right notes. That said, they did manage to skip over the “use-an-iPhone-playing-YouTube as a sedative” angle. 🙂

  • Android Where?

    There is no questioning the scope of Google’s ambitions. Consider the fact that yesterday’s two-and-a-half hour keynote was shorter than the 2013 version, and that the two keynotes had almost zero overlap!

    While last year Google spent a lot of time both enhancing the Android development environment and Google+, this year was about extending Android to a whole host of new devices, including watches, cars, and TVs. However, just because Android has been an unqualified success on phones – and deservedly so – I’m a bit dubious as to how well Google’s vision will translate to the next generation of devices, in particular Android Wear.

    Note: I reviewed all of Google’s announcement in today’s Daily Update (members-only)

    Watches Are Not Phones

    Beyond the rather obvious fact that one is on your wrist and the other is in your pocket, the primary difference between a watch and your phone is that you buy the former by choice and the latter by necessity. This has a significant effect on not just the size of the addressable market, but also the type of buyer in that market.

    Because a phone is a necessity – everyone is going to buy one – there is going to be a very large segment of the market whose purchase decision is driven primarily by price. In turn, this means the minimum acceptable product with the lowest price is going to garner the largest market share. Indeed that is exactly what has happened with phones: while the iPhone is actually increasing its dominance of the high end, Android has covered the entire rest of the market. And, as we learned yesterday, that market is now >1 billion in size (and the purpose of Android One is to capture the huge swathes who cannot or will not pay more than $100).

    To put it another way, in the case of a phone, the only decision to make is which phone to buy. When it comes to a watch or other wearable, though, there is another question that has to be answered first: do I even want to buy one at all.

    This additional question will make wearables a much more difficult market for Android to crack. Instead of simply making available an item the customer needs to buy at a low price, the wearable maker must first demonstrate a reason to buy into the category in the first place, and only then does price come into play. Moreover, any item that is purchased because you want it is a sort of luxury good, at least relative to something you buy because you need it, which by extension means the percentage of buyers who will prefer a premium option will be much greater. This is the primary reason why Android’s tablet share is much less than its phone market share, and its usage share lower still.

    New Devices Need New Interfaces

    In many respects Google’s push to take their dominant platform and port it to what’s next is reminiscent of Microsoft’s previous attempts to take their dominant platform – Windows – and port it to phones. Which is why the Pocket PC 2000 (a.k.a. Windows Mobile v1) looked like this:

    A screenshot from Pocket PC 2000 (Windows Mobile 1.0)
    A screenshot from Pocket PC 2000 (Windows Mobile 1.0)

    We laugh now at the idea of shrinking a PC UI to a phone, but I got the same sense from the Android Wear UI:

    Notifications on Android Wear
    Notifications on Android Wear

    It’s hard to see the notification UI clearly, but it basically looks the exact same as a phone notification, just shrunk down. And, just like the phone, you swipe to dismiss. Sure, it’s very cool how the notification then disappears from the phone, but at the end of the day it’s hard to escape the feeling that you’re simply wearing a second phone on your wrist. Is saving the effort of reaching into your pocket really worth the cost, not just in dollars, but also in comfort and fashion? I’m skeptical, and it’s hard to see a device like Android Wear being anything more than a niche product, just like Windows Mobile.

    Is Now the Future?

    Notifications are nice, but probably the biggest selling point of Android Wear is as a conduit for Android Now. It’s Now that to my mind really speaks to Google’s ambition: having mastered the world’s information, Google is now focusing on the individual. Now seeks to be your digital personal assistant, anticipating your needs and providing you the information you need when you need it (and, of course, building one heck of an advertising profile). And, when it comes to just-in-time information, the presentation of which is initiated by your device, a watch is in fact a rather compelling addition to a smartphone. After all, as long as your phone is in your pocket you may not see the reminder about your upcoming meeting, or that you ought to leave a few minutes early because of bad traffic. By virtue of being in a more accessible place on your body a watch may be superior for this sort of passive interaction.

    I question, though, if Now will turn out to be as meaningful to most people as Google thinks it will be. In other words, how many people actually want a personal digital assistant? There is an alternative view of computers in which they are more akin to a tool, something you pick up and use to do a job, and then set down when you are done with it. To be sure, that tool is incredibly powerful and capable of doing a great number of jobs, but it still operates in service of something outside of computers.

    Consider your Android phone: it’s a way to connect with friends and family, a way to entertain yourself, a way to capture memories, and a way to learn. It’s meaningful because it lets you do what you want to do better. A digital assistant, on the other hand, is simply a more efficient way of interacting with your computer – or your computer interacting with you – and I question how much that vision that will ultimately resonate with people.

    During yesterday’s keynote Benedict Evans posted this tweet:

    I think there is more than a grain of truth here when it comes to Google, but I do feel Apple thinks about computing differently. Recall Steve Jobs’ famous characterization of the Mac – a bicycle for the mind. While a bicycle makes a human more efficient, it still depends on that human for locomotion and direction. I think we see that today with Siri. Siri does not try to anticipate your needs or tell you what to do, instead she responds to questions delivered by humans, helping them to find the answers far more efficiently than they could on their own.

    The true test, of course, will come when we see Apple’s wearable. All of the criticisms I have levied against Android Wear potentially apply to Apple’s offering, particular the lack of a reason-to-buy. More fundamentally, though, the philosophical question I have raised is at the root of which company you think is more likely to own the future. Google already has the best computer, and their lead is only increasing; Apple, though, has always made the best bicycles.

  • Economic Power in the Age of Abundance

    At first, or second, or even third glance, it’s hard to not shake your head at European publishers’ dysfunctional relationship with Google. Just this week a group of German publishers started legal action against the search giant, demanding 11 percent of all revenue stemming from pages that include listings from their sites. From Danny Sullivan’s excellent Search Engine Land:

    German news publishers are picking up where the Belgians left off, a now not-so-proud tradition of suing Google for being included in its listings rather than choosing to opt-out. This time, the publishers want an 11% cut of Google’s revenue related to them being listed.

    As Sullivan notes, Google offers clear guidelines for publisher’s who do not want to be listed, or simply do not want content cached. The problem, though, as a group of Belgian newspapers found out, is that not being in Google means a dramatic drop in traffic:

    Back in 2006, Belgian news publishers sued Google over their inclusion in the Google News, demanding that Google remove them. They never had to sue; there were mechanisms in place where they could opt-out.

    After winning the initial suit, Google dropped them as demanded. Then the publications, watching their traffic drop dramatically, scrambled to get back in. When they returned, they made use of the exact opt-out mechanisms (mainly just to block page caching) that were in place before their suit, which they could have used at any time.

    In the case of the Belgian publishers in particular, it was difficult to understand what they were trying to accomplish. After all, isn’t the goal more page views (it certainly was in the end!)? The German publishers in this case are being a little more creative: like the Belgians before them they are alleging that Google benefits from their content, but instead of risking their traffic by leaving Google, they’re instead demanding Google give them a cut of the revenue they feel they deserve.

    The obvious reaction to this case, as with the Belgian one, is to marvel at the publisher’s nerve; after all, as we saw with the Belgians, Google is driving traffic from which the publishers profit. “Ganz im Gegenteil!” say the publishers. “Google would not exist without our content.” And, at a very high level, I suppose that’s true, but it’s true in a way that doesn’t matter, and understanding why it doesn’t matter gets at the core reason why traditional journalistic institutions are having so much trouble in the Internet era.

    One of the great paradoxes for newspapers today is that their financial prospects are inversely correlated to their addressable market. Even as advertising revenues have fallen off a cliff – adjusted for inflation, ad revenues are at the same level as the 1950s – newspapers are able to reach audiences not just in their hometowns but literally all over the world.

    Before the Internet, a newspaper like the New York Times was limited in reach; now it can reach anyone on the planet
    Before the Internet, a newspaper like the New York Times was limited in reach; now it can reach anyone on the planet

    The problem for publishers, though, is that the free distribution provided by the Internet is not an exclusive. It’s available to every other newspaper as well. Moreover, it’s also available to publishers of any type, even bloggers like myself.

    The city-by-city view of Stratechery's readers over the last 30 days.
    The city-by-city view of Stratechery’s readers over the last 30 days.

    To be clear, this is absolutely a boon, particularly for readers, but also for any writer looking to have a broad impact. For your typical newspaper, though, the competitive environment is diametrically opposed to what they are used to: instead of there being a scarce amount of published material, there is an overwhelming abundance. More importantly, this shift in the competitive environment has fundamentally changed just who has economic power.

    In a world defined by scarcity, those who control the scarce resources have the power to set the price for access to those resources. In the case of newspapers, the scarce resource was reader’s attention, and the purchasers were advertisers. The expected response in a well-functioning market would be for competitors to arise to offer more of whatever resource is scarce, but this was always more difficult when it came to newspapers: publishers enjoyed the dual moats of significant up-front capital costs (printing presses are expensive!) as well as a two-sided network (readers and advertisers). The result is that many newspapers enjoyed a monopoly in their area, or an oligopoly at worse.

    The Internet, though, is a world of abundance, and there is a new power that matters: the ability to make sense of that abundance, to index it, to find needles in the proverbial haystack. And that power is held by Google. Thus, while the audiences advertisers crave are now hopelessly fractured amongst an effectively infinite number of publishers, the readers they seek to reach by necessity start at the same place – Google – and thus, that is where the advertising money has gone.

    And so, the German publishers are both right and wrong. Without content generated by others, without the proverbial hay, Google would not exist. But at the same time, as the Belgian publishers learned eight years ago, any one publication is but a single haystalk, easily blown by the wind or trampled underfoot, and no one cries – or worse, even notices – when it is gone. Certainly not Google, and certainly none of the advertisers who provide the money to which the German publishers wrongly feel they are entitled.