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  • Casual Gaming is a Sustainable Business, but Not a Platform Differentiator

    This series of posts is about enabling sustainable businesses on the App Store. In Part 1, I discuss why Paper and other productivity apps may not be doing as well as you might think. Part 2 explores why casual games, in contrast, are a sustainable business, but not a differentiator for platforms (I added a follow-up here). Part 3 analyzes why Apple in particular seems hesitant to enable sustainable businesses on the app store.

    Paper wasn’t the only app in the news last week.

    King, the maker of Candy Crush Saga, is planning for an IPO:

    The opportunity is there for mobile game makers who can strike the right cord with their audience. Mobile game sales are expected to ring in at more than $9.9 billion this year, up 13.5% from the $8.8 billion spent in 2012, according to market researcher PwC…

    The company’s leading game, “Candy Crush Saga,” was launched on Facebook in April 2012. It is the most popular app on Facebook, with an estimated 15.4 million average daily users as of the most recent figures, according to AppData, an independent firm that tracks online activity.

    “Candy Crush Saga” has also been one of the most frequently downloaded free apps via the iPhone and Google Play, according to App Annie, which tracks app store purchases. It is also among the highest grossing apps on iPhone and Google Play when users’ in-game purchases are considered, App Annie figures show.

    Stories like this, along with the $10 billion dollars Apple has paid to developers, would seem to be the obvious counterpoint to my app store pessimism.

    Tim Cook announcing that Apple has paid $10 billion to app developers (credit The Verge)
    Tim Cook announcing that Apple has paid $10 billion to app developers (credit The Verge)

    But the more I think about it, the more I’m not so sure.

    It’s games like Candy Crush Saga – free, with in-app purchase – that are fueling much of that $10 billion. According to App Annie1, for the iPhone:

    • 95 out of the top 100 grossing apps feature in-app purchase
    • 79 out of the top 100 grossing apps are free to download

    The numbers are broadly similar on Android, with an even sharper skewing towards free: 96 out of 100 of the top 100 grossing apps are free to download.

    There are some important implications here for both Apple and app developers:

    New monetization options can enable sustainable businesses built on the app store

    Apple allowed in-app purchases in free-apps in October, 2009. You can draw a direct line from that policy change to King’s IPO. For those who love apps, this is great news: it is possible to build a sustainable business on the app store, if the right policies and mechanisms are in place.

    In the case of in-app purchase, a monetization mechanism built directly into gameplay is a powerful driver of purchase, allowing developers to make money from their existing customers. That is the key to a sustainable business.

    Only games can build a business on in-app purchases

    Unfortunately, building a sustainable business on in-app purchases requires an infinitely available good. For example, in Candy Crush Saga, if you die five times on a level, you can’t try again for 30 minutes. Unless, of course, you’d like to buy 5 more lives for $0.99. Providing those five lives entails nothing more than resetting a counter.

    This doesn’t work for non-games. Look back at Paper: building the Mixer was a massive engineering challenge, yet they only charged $1.99 once.

    Casual games do not differentiate app platforms

    Candy Crush Saga was originally a web game, then a Facebook game, and was later ported to both the App Store and Google Play (it’s the top grossing app on both). In fact, cross-platform play is one of its selling points:

    King.com kept the game near identical across all platforms, with a similar map screen, leaderboard, UI and more as well as letting the player carry their game progress across all platforms.

    “It’s a great customer experience,” says Dave Rohrl, vice president of game production at Goko. “You can experience the game when, where and how you want. This lets players interact with your game a lot more, which ultimately increases their engagement and monetization.”

    That’s great for King – more potential customers, and more opportunities for monetization – but it’s not something Apple (or Google) should feel particularly special about.

    Unlike the PC wars, I don’t think casual games will prove to be much of a differentiator between the various platforms for a few reasons:

    • Games take over the whole screen; this means that tailoring a game to fit a particular platform’s look and feel isn’t important
    • There is an entire industry devoted to providing cross-platform compatibility from day one. Most game developers are targeting game engines such as Unity, not iOS or Android. This is acceptable because of point one
    • Games are much more likely to be faddish; how many of you are playing the same games you were three months ago, much less three years ago?

    Net: no one is buying (or not buying) an iPhone or Android device because of Candy Crush Saga, or any other casual game.

    Thus, from a strategic perspective, that $10 billion is not nearly as impressive as it looks, especially since in-app purchase has unlocked revenue for Google Play developers as well. Any discussion of Apple’s app moat should first discount the entire casual game genre.

    This is a three-part series on enabling sustainable businesses on the app store.

    1. Stats collected on June 24 ↩

  • Papering Over App Store Problems

    This series of posts is about enabling sustainable businesses on the App Store. In Part 1, I discuss why Paper and other productivity apps may not be doing as well as you might think. Part 2 explores why casual games, in contrast, are a sustainable business, but not a differentiator for platforms (I added a follow-up here). Part 3 analyzes why Apple in particular seems hesitant to enable sustainable businesses on the app store.

    On the occasion of the launch of Stratechery, I set Cosmonaut to iPad, and drew this:

    I drew this to illustrate the first Stratechery post
    I drew this to illustrate the first Stratechery post

    Admittedly, compared to some of the stuff Made with Paper, my sailboats are nothing special. But for me, it was honestly a feeling I really didn’t anticipate: I drew something, and it didn’t suck!

    Paper is a transformative, device-defining app, and has been awarded accordingly by both Apple and the design industry. According to App Annie, as of June 21, Paper ranked 7th in the Productivity category according to downloads (119th overall after a recent jump), and 4th in revenue (108th overall).

    By every visible measure, FiftyThree, the makers of Paper, are the definition of an app store success story, and this week they closed a Series A round of financing led by Andreessen Horowitz.

    It’s easy to see this as a big endorsement of the App Store: startup creates a breakthrough product, gets noticed, gets funding, changes the world. And perhaps that’s the path FiftyThree is on.

    But there’s another scenario that may be in play, and if I were Apple, this round of funding and FiftyThree’s plans going forward should be a yellow flag that the App Store may not be as strong as it could be.

    Some pertinent facts about this round of funding and the circumstances leading up to it that deserve a closer look:

    • As recently as January, FiftyThree had the same five employees they started with. In the intervening five months, they have quadrupled the size of their team.

      The positive spin is that business is good, ideas are large, and amazing products are on the horizon. The more pessimistic view is that FiftyThree has decided they need to “Go Big or Go Home”. In other words, while they were an App Store success story, the revenue they generated wasn’t sufficient to support five employees, so they’ve decided to take their shot at massively increasing revenue.

    • Last October, Paper added the Mixer for a $1.99 in-app purchase. This was the first new additional item for sale beyond the original pencil, marker, pen and paintbrush (available for $1.99 each or $6.99 for the set).

      Then, this May, Paper gained the ability to zoom in a really unique way. It was a major feature request, yet surprisingly, it was completely free. No in-app purchase required. Perhaps FiftyThree just loves their customers. Or perhaps this is the sign of a new business model.

    • According to FiftyThree’s blog post announcing the funding, they are looking to focus on collaboration and hardware.

      The positive spin is that these are really interesting areas to take a creation app; imagine the possibilities!

      But the truth is I really struggled to find the positive spin; collaboration and hardware, while interesting, seem counter to the original Paper vision:

      It seems to me that Paper was originally about inspiration and ideas easily and simply created, not collaboration and finicky hardware. But, and I think this is the crucial point, collaboration and hardware have obvious paths to sustainable monetization.

      • Collaboration could require a subscription service that will provide revenue over time
      • Hardware can be sold for much higher prices than $1.99 (The Pogo Connect, which Paper supports, sells for $79.95 plus accessories).

    This is what I think happened to FiftyThree and Paper:

    The FiftyThree Timeline. Months mark the founding, Paper releases and updates, and fundraising.
    The FiftyThree Timeline. Months mark the founding, Paper releases and updates, and fundraising.

    With a small amount of seed funding, the original five employees set out to build Paper, the best place to capture your ideas. After launching a year later, they began to reap the rewards through in-app purchases. They kept improving the app, and came out with a significant update in October – the Mixer – for $1.99.

    And then they realized that they were five people living in New York City without an obvious route to sustainable revenue.

    The problem for Paper is the same for all productivity apps in the App Store: there is no way to monetize your existing users. Look at me:

    The revenue FiftyThree has made from me (after Apple's 30%) versus the value they have created.
    The revenue FiftyThree has made from me (after Apple’s 30%) versus the value they have created.

    My use of Paper is an essential part of stratechery, yet I needed to only pay $8.99 for two in-app purchases, for which I never need to pay again. That’s a hell of a bargain, but it’s ultimately unsustainable.

    I wrote extensively about the problems facing apps like Paper in Adobe’s Subscription Model and Why Platform Owner’s Should Care:

    The challenges facing Adobe are shared by almost all productivity apps.

    • Productivity apps are indispensable (and thus priceless) to some users
    • Productivity apps usually have high learning curves
    • Well-done productivity apps require significant investment up-front
    • Productivity apps require regular maintenance and upgrades

    Unfortunately, app store economics don’t really work here.

    • If you have a low price, you need massive volume to make up for the upfront costs
    • If you have a high price, users are much less likely to buy your app, especially since there is likely a learning curve
    • If you can’t monetize over time, your users are extracting MUCH more value than you are receiving in revenue. That’s great if you’re a user, up until the company you love sells out because they can’t make money. Sparrow is the canonical example here. How many Sparrow devotees would gladly pay $5 a month to have the app available and continually updated?

    Trials do ameliorate the pain a little, particularly if you pursue the high price option, but they don’t address the time mismatch: as a productivity app becomes more valuable, the developer doesn’t get a dime of more revenue.

    There is so much more Apple (and the other platform owners) could be doing to improve this situation; paid updates and app-store supported subscriptions (beyond Newsstand) would be great places to start.

    Moreover, it’s something Apple should be investing in. The App Store remains the largest moat around iOS; apps like Paper simply don’t exist on Android. Perhaps FiftyThree planned to go in this direction all along, and if so, good for them. But if they originally wanted to make a living on the App Store, and can’t, then their future probably includes more platforms than just iOS (a loss for Apple) and a chance of outright failure (a terrible loss indeed).

    Of course, there were no significant changes to monetization options in iOS 7; the team was too busy. But were they busy on the most essential things?

    This is a three-part series on enabling sustainable businesses on the app store.

  • Strategy Credit

    I’d like to propose a new term in the business strategy lexicon: a strategy credit. It’s basically the opposite of a strategy tax. As I wrote a few weeks ago:

    A strategy tax is anything that makes a product less likely to succeed, yet is included to further larger corporate goals

    An obvious example is last week’s release of Office for iPhone, but not iPad. I don’t have any visibility into the thinking here, but clearly it’s best for Office to be on as many platforms as possible, but better for Windows that Office only be available on Windows 8.

    Anyhow, this morning saw the opposite of a strategy tax with Apple’s Commitment to Customer Privacy (emphasis mine):

    Apple has always placed a priority on protecting our customers’ personal data, and we don’t collect or maintain a mountain of personal details about our customers in the first place. There are certain categories of information which we do not provide to law enforcement or any other group because we choose not to retain it.

    For example, conversations which take place over iMessage and FaceTime are protected by end-to-end encryption so no one but the sender and receiver can see or read them. Apple cannot decrypt that data. Similarly, we do not store data related to customers’ location, Map searches or Siri requests in any identifiable form.

    You can almost hear it now:

    How admirable! Golly gee, Apple is such a better company than those hypocritical evil-doers at Google! Why can’t everyone treat customers so well? Apple good. Google bad. Facebook worse.

    The truth is this is nothing more than a strategy credit:

    Strategy Credit: An uncomplicated decision that makes a company look good relative to other companies who face much more significant trade-offs. For example, Android being open source

    User information of this type isn’t important to Apple’s business model, so they “choose not to retain it.”1 There’s nothing worth praising here – or denigrating – but it’s worth acknowledging.2

    In the meantime, though, Apple will happily score rhetorical points in the court of public opinion for a decision that wasn’t difficult at all.

    1. They do, however, happily retain all of your credit card information, to choose one example ↩

    2. Before you say that all companies should have Apple’s business model, I suggest reading Free by Dr. Drang ↩

  • When Apple Moves Fast

    In October 1999, Steve Jobs announced that the future of the Mac was video.

    In January 2001, Jobs laid out a new strategy: the Mac would be a digital hub, and their first focus would be music.

    In 15 months, the entire strategy shifted, and the company along with it.

    “I felt like a dope,” says Jobs, thinking back to summer 2000, when his fixation on perfecting video editing on the Mac distracted him from noticing that millions of kids were using computers and CD burners to make audio CDs and to download digital songs called MP3s from illegal online services like Napster. Yes, even Jobs, the technological visionary of his generation, occasionally gets caught looking in the wrong direction. “I thought we had missed it. We had to work hard to catch up.”

    Eight months later came the launch of the iPod.

    In October 2012, Jony Ive replaced Scott Forstall. In 7 months, 1 week, and 5 days iOS has undergone a seismic shift:

    iOS 7 preview page on left (link); iOS 6 preview page on right (link)
    iOS 7 preview page on left (link); iOS 6 preview page on right (link)

    The question we should be asking is what this shift, and the urgency with which it was executed, portends.1

    1. Related: Apple, Samsung, and the Parable of the Model T ↩

  • Waze Winners and Losers

    Google acquired Waze earlier this week for a reported $1.03 billion. This is an interesting deal for a few different reasons with a clear set of winners and losers.

    Big Winner: Waze

    This is an incredible exit for a company with only ~17 million active users and negligible revenues. Waze is a great product – I’m a big user – but it was ever only going to be a niche player. Maps are too integrated into every mobile platform, and if a user is dissatisfied with the default app, Google Maps is a readily available option.

    Moreover, the value of mapping comes not from direct monetization, but from the signal it sends about users and their location; the monetization comes via targeted ads on other devices and in other apps.

    The signal-to-ads cycle. Click the image for the original article.
    The signal-to-ads cycle. Click the image for the original article.

    Waze was never going to build out this cycle, which limited their direct revenue options to incredibly annoying pop-up ads that distracted from driving.

    Still, you are worth the price someone will pay, and Waze did a tremendous job playing Google, Facebook, and Apple off of each other. The price is justified.

    Winner: Google

    Google claims Waze will remain independent, and why not? The actual product doesn’t matter to Google at all. Rather, this was all about moat building. As I’ve written previously, Google dominates the signal-to-ads cycle because they have both the best signals and the best ad delivery platforms.

    Facebook is probably their closest competitor for the advertising side of that equation, but their signal, particularly in mobile, is much weaker. Buying Waze so that Facebook can’t is a victory all by itself.

    Neutral: Users

    There are two big wins for users here:

    • The weakest part of Waze is the search experience. Frankly, it’s terrible. I have a sneaking suspicion that Google can help out here.
    • There’s a decent chance that Google will kill Waze’s current monetization model completely, which will make the app much more pleasant to use.

    There are also clear downsides:

    • If you didn’t want to send your location information to Google, well, now you have one less option.
    • Google’s history with acquisitions is not great to begin with. Add in the fact that this acquisition was purely defensive, and it’s hard to see how Waze doesn’t wither on the vine. That’s too bad.

    Loser: Apple

    Waze was one of the data sources for Apple Maps. It’s unclear what data they contributed exactly, but regardless, the last thing Apple Maps needs is less data.

    That said, I don’t think an acquisition made sense, especially at this price. Apple doesn’t play (much) in the ad game, so there wasn’t the same strategic imperative to pay. I’m sure they’re sad to lose the data, but not $1.03 billion sad.

    Big Loser: Facebook

    This is a huge missed opportunity for Facebook. They are, for better or worse, locked in to the advertising game, and there are few more useful signals than mapping. When you add in the fact that Waze is social at its core, this seems like a perfect fit.

    I’m sure Facebook was concerned about the small amount of active users Waze had, but more than that, I suspect Facebook had their hands tied by their disastrous IPO. Investors are very suspicious of Facebook – for good reason – and may not have tolerated such a large expenditure for so little short-term gain. There are a lot of Facebook employees still underwater, and Zuckerberg and team may not have felt the risk of investor backlash was worth it. To be clear, this is conjecture, but there really doesn’t seem to be another good reason why Facebook wouldn’t have outbid Google.

    Then again, maybe outbidding Google was impossible. They know better than anyone that advertising is trending towards winner-take-all, and that monopolizing signals is priceless.

  • Tim Cook is a Great CEO

    Perhaps my favorite Steve Jobs keynote moment was one of his last, at the iPad 2 introduction in March 2011. The last demo of the day, just before Jobs introduced the idea that Apple existed at the intersection of technology and liberal arts, was GarageBand for iPad. The demo was truly spectacular, and it clearly moved Jobs:

    Even in the moment, it was clear to me this was far more than another Apple keynote demo; music had always been hugely important to Jobs, but more than that, the idea that computing ought to be personal, and ought to be enabling, had been Jobs’ mantra. The iPad, more than any other device, and GarageBand, more than any other software, were the culmination of Jobs’ life work.

    I thought I witnessed a similar moment yesterday when Tim Cook formally introduced iOS 7.

    The content of these clips is totally different, but to my eye, the emotion is the same. Just as Jobs saw his life’s ambition coming to fruition, so did Cook.

    Cook is clearly a different person than Jobs, with different skills, and different motivations. That’s wonderful news for Apple; while a company can reinvent itself around new products and new categories, and continue to thrive,1 I believe culture is the sort of pie that can only be baked once.

    I had the good fortune of being an intern at Apple, which gave me the opportunity to spend an hour (along with a few hundred of my closest intern friends) with every member of the leadership team, including Jobs and Ive. Cook was, by a significant margin, the most impressive of all of them.

    It’s difficult, in retrospect, to explain why he was so impressive, but I find my struggles eerily similar to the struggles business historians and sociologists have in explaining what company culture is, and why it matters. Tim Cook, at least to my young, rather unjaded eyes, was Apple. He spoke to me – and to every person in the room – as if I were the only person in the world, and that he truly wanted me to understand what made Apple unique. Oh sure, the words were there – he spoke about Apple’s focus, and willingness to say “no,” and about design – but it was the way in which he said it that made you believe. For me anyway, his reality distortion field was far more powerful than Jobs’.

    It was obvious that Cook understood Apple, loved Apple, and was clearly the right man to make the decisions necessary to preserve Apple.

    Decisions like firing Scott Forstall.

    Forstall spoke to the interns as well. It was an incredibly impressive talk, and an incredibly disturbing one. Forstall was clearly the smartest person in the room; what was disturbing was that he obviously knew it, and wanted us all to know it as well.2 When the news broke about his firing, I was totally shocked, yet totally unsurprised.

    Still, imagine what guts it took to fire him. Forstall is, more than anyone on the planet – including Jobs – responsible for the iPhone (for this reason alone I found the potshots taken at Forstall, particularly by Craig Federighi, to be in poor taste). He is an incredible engineer – legend has it he could write, or rewrite, nearly any part of the iOS source code on command, and would routinely do so to win disputes in managerial meetings – and a NEXT man, and the closest thing to a Steve Jobs 2.0.

    Yet Cook fired him anyway.

    Apple didn’t need another Steve Jobs. The price of individual brilliance is collective friction, and only a founder has the cultural capital to make the elevation of the individual possible. After all, he/she created the culture to begin with!

    It’s not unlike a revolutionary movement: typically there is the transcendent leader, surrounded by the true believers. Eventually the leader departs, but the revolutions that endure have an ideology that continues to unite. To be sure, over time said ideology ossifies into rules enforced by a bureaucracy, until a new revolution uproots the old one, but this can take many years, even decades.

    Most revolutions, though, don’t make it that far. Usually, when the leader departs, his closest lieutenants scheme and fight for the throne, and the entire movement implodes. This was always my fear for Apple: Steve Jobs was the glue that united a strong, stubborn, and talented company that continually operated under high pressure. What would happen when the glue was gone?

    Tim Cook has answered that question: the glue is Apple, and the ideology is design. It is a shared belief system that “No” is more important than “Yes,” that focus is essential to making great products, and that no one individual is essential. Not Steve Jobs, and certainly not Scott Forstall.

    I don’t know if iOS 7 is going to be a smashing success. I certainly have my opinion, and I’m sure I will share it in due course, although I will give Ive and team the benefit of actually using the product first. However, I am confident that the process of creating iOS 7 was sound, and, more importantly, it was sustainable and accretive to Apple and Apple’s culture.

    That is why Cook was so happy. While Jobs’ mission in life was personal computing, and Apple the by-product, Cook’s mission in life is Apple, and iOS 7 was the by-product of his commitment to ensuring that Apple endured.

    The job of Apple’s CEO is, first and foremost, to understand what makes Apple, Apple. That is far more important than product sense, or operations excellence, or taste, or a million other attributes thrown around by pundits and analysts. On this criteria, it’s clear that Cook is the right man for the job. I would contend that anyone that says otherwise doesn’t understand revolutions, doesn’t understand culture, and doesn’t understand Apple.

    The truth about the greatest commercial of all time – Think Different – is that the intended audience was Apple itself. Jobs took over a demoralized company on the precipice of bankruptcy, and reminded them that they were special, and, that Jobs was special. It was the beginning of a new chapter.

    “Designed in California” should absolutely be seen in the same light. This is a commercial for Apple on the occasion of a new chapter; we just get to see it.

    This is it.

    This is what matters.

    The experience of a product.

    How it will make someone feel.

    Will it make life better?

    Does it deserve to exist?

    We spend a lot of time on a few great things, until every idea we touch enhances each life it touches.

    You may rarely look at it, but you’ll always feel it.

    This is our signature, and it means everything.

    1. See IBM for Exhibit A ↩

    2. I know you will accuse me of judging through the rear view mirror, but I absolutely felt this way at the time ↩

  • "Strategery"

    UPDATE: I switched it up. It’s struh tek er ee, as in strategy and tech

    Wikipedia:

    The word “strategery” (/strəˈtiːdʒəri/ strə-tee-jər-ee) was coined for a Saturday Night Live sketch, written by James Downey, airing October 7, 2000, which satirized the performances of George W. Bush and Al Gore, two candidates for President of the United States, during the first presidential debate for election year 2000. Comedian Will Ferrell played Bush and used the word “strategery” (a mock-Bushism playing on the word “strategy”), when asked by a mock debate moderator to summarize “the best argument for his campaign”, thus satirizing Bush’s reputation for mispronouncing words. The episode was later released as part of a video tape titled Presidential Bash 2000.

    The clip:

    Keep this in mind the next time you want to refer to this site verbally.

  • The Jobs TV Does

    This is Part 3 of a three-part series on what changes, if any, may be coming to TV

    TV, as I have recounted in the last two articles, is as firmly entrenched as an incumbent can be.

    • The idea that you can cut the cord and simply watch the shows you currently want to watch (unbundling) is a fantasy; the economics that make those shows possible depend on the current pay-TV model (See Part 1: The Cord-Cutting Fantasy)
    • Great content has few substitutes, high barriers of entry, and depends on networks as de facto venture capitalists willing to take risks on new shows (See Part 2: Why TV Has Resisted Disruption)

    Competing with this model has, and will continue to, fail. There is no go-to-market strategy that is feasible.

    In fact, the only way things will change is through true disruption.

    Disruption is a funny word; in most of the tech press, it has come to mean little more than “competitive,” and functionally superior products are often labeled as “disruptive.”

    This is precisely backwards; a disruptive product is inferior to the incumbent, and usually relies on a completely different business model (usually a lower margin one). A disruptive product is almost always cheaper, and in fact usually doesn’t seem competitive at all, at least in the beginning.1

    Competitive (or “sustaining”) products simply try to provide the same function but better. TIVO is a classic example in this space; TIVO’s competitive proposition is that it is a better set top box than the one you get from your cable company:

    • Both the set top box from your cable company (STBFYCC) and the TIVO change channels
    • Both the STBFYCC and the TIVO display a channel guide
    • Both the STBFYCC and the TIVO pause live TV
    • Both the STBFYCC and the TIVO record shows to watch later
    • Both the STBFYCC and the TIVO can be programmed to record a specific show

    The TIVO does a lot more, and does it better, but the differentiation is at the margins. It is a sustaining product, and has serious limitations: getting cable cards is a pain, and the upfront cost is significant relative to STBFYCC. I have no doubt Apple, say, could create a set top box even better than a TIVO; I also have no doubt that it would suffer the same fate.

    So, if a better set-top box is doomed, what might disrupt TV?

    The theory of disruption rests on the idea of “jobs to be done.”2 TIVO does the same job as a set top box; but – and this is the crucial point – the set top box is only a means to an end. What is the job we hire TV to do?

    It turns out there are quite a few. Some of the jobs TV has traditionally done include:

    • Keep us informed
    • Educate
    • Give a live view of sporting events
    • Enlighten and story-tell
    • Provide escapism

    For decades TV was better at each of these jobs than anything else in consumers’ lives. It was in this period of superiority that the present economic system of pay-TV was developed, and, in a world where so many jobs were done by one device, any price was a great deal.

    It’s in jobs-to-be-done, however, where the unbundling that matters is happening. “Keep us informed” is the obvious one: the idea of relying on TV news is so archaic to most of you that I know I raised your hackles by even putting it in that list. Same thing with “educate” – one can learn far more from the web than even the best TV.

    In other words, two of the jobs TV has traditionally done are now done far better, and far more cheaply, by personal devices like computers, tablets, and phones. That is disruption.

    Yet, we pay more than ever for TV; the vast majority of the population gives enough of their attention to some combination of sports, story-telling and escapism to sustain the current model.

    It’s attention that is key; our attention is a zero sum resource – every minute I spend playing a game, for example, is a minute I don’t spend watching TV. And, if any company “cracks” TV, it’s not that they’ve figured out how to do TV better, but that they’ve figured out how to win a greater and greater share of consumer’s attention by doing the same jobs that TV does, but better.

    TV is so entrenched because it’s actually cheap for what you get, it benefits from tremendous network effects, and it’s a default choice for most people. In fact, its entrenchment is not unlike the entrenchment of the PC, which ruled the roost for 25 years: cheap for what you get, tremendous network effects, and Windows was the default choice.

    Ultimately, what disrupted the PC was not a competitive product; even today Windows still has >90% share of PCs. However, Windows commands an ever dwindling share of the time spent on all devices; phones and tablets have taken away attention because they do many of the jobs we previously hired PCs to do – read, draw, music, video, games – better.

    The disruption of TV will follow a similar path: a different category will provide better live sports, better story-telling, or better escapism. Said category will steal attention, and when TV no longer commands enough attention of enough people, the entire edifice will collapse. Suddenly.

    I’d bet on escapism being the next job we give to something else, for a few reasons:

    • The economics of live sports are completely intertwined with the pay-TV model; this will be the last pillar to crumble
    • Networks still play a crucial role in providing “venture-funding” for great story-telling. Netflix is the great hope here
    • Escapism is in some sense indiscriminate; it doesn’t matter how our mind escapes, as long as it does. Yet it’s also highly personal; the more tailored the escape, the more fulfilling. This is why there are hundreds of TV channels. However, there will never be as many TV channels as there are apps.

    Imagine a $993 “console” with an optional $49 controller and an App Store.4 That’s a lot of potential escapism, and a lot of user attention. It’s a lot of margin too, at least at high volumes. I think it’s a space where a company that thinks different could have a “a significant contribution” and “crack” TV by not, in fact, being a TV at all.

    This is a three-part series.

    • Part 1: The Cord-Cutting Fantasy. Getting only the content you want without paying for everything is a fantasy. Pay TV is socialism that works.
    • Part 2: Why TV has resisted disruption. Great content is differentiated, has high barriers to entry, and depends on networks.
    • Part 3: The Jobs TV Does. The key question is attention, not set top boxes. What jobs do we hire TV to do?

    Also see Steve Jobs on TV, my Apple TV prediction, and my Additional Notes on TV

    1. You could get far with the assumption that anything the blogosphere calls disruptive, isn’t. It’s simply competitive ↩

    2. For more on jobs-to-done, check out this article on the Facebook Phone ↩

    3. Or maybe $129? I think Apple would shoot for their traditional 30% margin ↩

    4. Probably the most potent form of escapism is gaming, and within gaming, I would segregate hard-core gaming from casual gaming. The former is mentally strenuous, the latter decidedly less so. Moreover, the hardware costs required to support hard core gaming are prohibitive for many consumers ↩

  • Why TV Has Resisted Disruption

    This is Part 2 of an exploration of what changes, if any, may be coming to TV. Yesterday I examined why cutting the cord yet keeping the shows you watch (i.e. unbundling) was a fantasy. Also, I should note that yesterday and today’s post are very US-centric; more on the international potential in Part 3

    Pay-TV is a good deal for networks, cable companies, and users. It’s socialism that works.

    But what about the content? Isn’t that the point? Free the content from the networks, and at last we can pay a nominal fee to watch what we want on any Internet-connected device.

    Well, yes, it is about the content; in fact, it’s the content that, in my mind, protects the current system from being significantly disrupted.

    Great content has low elasticity of substitution

    Not all Pay-TV is created equal; while filler content is everywhere, it’s truly great content that drives affiliate fees. Look at the most expensive networks on a per-subscriber basis:

    Affiliate fees and CPMs
    Affiliate fees and CPMs
    • Sports is obviously huge here. There is no substitute, and the affiliate fees reflect that
    • Disney Channel and Nickelodeon have fantastic brands; Dora, Mickey Mouse Clubhouse, and Phineas and Ferb1 are the Lakers, Yankees and Cowboys of kids programming
    • TNT, USA, TBS and FX all have original programming with sizable fan bases, and TNT has the NBA
    • FOX News has highly differentiated itself. I’ll leave it at that.

    None of this content is easily substituted, which allows networks to increase affiliate fees, which serves to preserve the current system.

    Great content production has a high barrier to entry

    Sports is, once again, the obvious story here. There is a finite supply of programming, it is rarely time-shifted (which drives advertising dollars – see the right-side of the chart above), and it’s incredibly expensive. At the national level:

    • $4.4 billion a year for NFL rights (beginning in 2014) link
    • $930 million a year for NBA rights (contract ends in 2016) link
    • $800 million a year for MLB rights (beginning in 2014) link

    This doesn’t include the myriad of college sports, nor regional deals. It’s a lot of money that is directly connected to rising affiliate fees.

    But great scripted programming is expensive as well. AMC pays an estimated $2.71 million for an episode of Mad Men, and Netflix paid $100 million for two 13-episode seasons of House of Cards (more on Netflix in a moment).

    Anything that conceivably draws customers away from the pay-TV model will need to have compelling content, and said content has a very stiff price of entry.

    Networks matter just as much as content

    Several folks noted that yesterday’s post focused on networks, not shows.

    I think it does hold water, and I’d actually use Silicon Valley as the analogy: what makes Silicon Valley possible, and so hard to replicate, is not just the presence of startups or willing entrepreneurs; rather, the critical factor is Sand Hill Road. Angels and VCs with substantial war chests and the willingness to make ten deals knowing that nine will fail are essential to what makes the Valley go.

    In the case of TV, networks are the VCs. They pay for expensive pilots and concepts, many of which don’t turn out, and bank on making money on the ones that do. They’re just as critical to great content creation as are the producers, directors, actors, etc. And networks love the affiliate system.

    Netflix is just another network

    Netflix famously pivoted from DVDs-by-mail to streaming, but that was only pivot number one. Pivot number two was their transformation from a content delivery provider to simply another network.

    Think about it: Netflix invests millions of dollars in new TV shows to drive growth, and has reruns and old movies as filler. They’re HBO with a unique delivery system. Or, to fit the analogy, Netflix is just another VC, with a war chest built by a completely different business (the aforementioned discs-by-mail).

    Netflix is unique, but ultimately uninteresting, and unlikely to be replicated.

    YouTube is Kickstarter

    One final analogy: just as Kickstarter lets entrepreneurs forego VCs, YouTube lets content creators forego networks. That’s fine as far as it goes, but the likelihood of a breakthrough hit is low, and if one were to occur, it would likely be snapped up by a network.

    This is a three-part series.

    • Part 1: The Cord-Cutting Fantasy. Getting only the content you want without paying for everything is a fantasy. Pay TV is socialism that works.
    • Part 2: Why TV has resisted disruption. Great content is differentiated, has high barriers to entry, and depends on networks.
    • Part 3: The Jobs TV Does. The key question is attention, not set top boxes. What jobs do we hire TV to do?

    Also see Steve Jobs on TV, my Apple TV prediction, and my Additional Notes on TV

    1. This originally said Phineas and Herb. Oops. Thanks to Mike Byrne for the correction ↩

  • The Cord-Cutting Fantasy

    Predictably, television was one of the first topics Tim Cook was asked about at yesterday’s interview at AllThingsD. This followed the rumors of Yahoo acquiring Hulu, and Microsoft’s entertainment-centric Xbox One launch last week.

    It’s all about TV and the imminent age of cord-cutting. On this the blogosphere is certain.

    Except for one little problem: the economics of cord-cutting simply don’t make sense, for neither networks nor viewers.1 Consider two examples: ESPN and AMC.

    ESPN is the linchpin upon which cable television turns. It’s the sole reason many people have cable, and it’s insanely profitable. The vast majority of that profit comes from affiliate fees paid by cable companies on a per-subscriber basis (unless otherwise noted, all numbers are from this Forbes article that combines information from Disney’s annual report and data from SNL Kagan):

    ESPN FY12 Revenue: $9.4 billion

    • Affiliate fees: $6.1 billion
    • Ad revenues: $3.3 billion

    That’s about $508 million per month in affiliate fees alone, from about 100 million households.

    Last week, ESPN averaged 1.36 million viewers in primetime, which is 9.52 million for the week, or about 40.8 million for the month. I think it’s fair to say that most of those are not uniques, to use Internet parlance. If we assume that the average ESPN household tunes in eight times a month in primetime, then that means about 5 million households watch ESPN a month.

    Let’s assume this is true.2 That means:

    • Every household pays $5.13 per month for ESPN in affiliate fees
    • Only 4.8 percent of households watch ESPN. If ESPN were only available a la carte, each of those households would have to pay $101.60/month for ESPN to achieve the same revenue numbers they do currently
    • The 95.2 percent of households who don’t watch ESPN would only see their cable bills decrease by $5.13 were they able to exclude it

    UPDATE: The ESPN numbers were too low; they are closer to $15/viewer. See the update here

    ESPN is a special case for many reasons, so let’s take AMC, a geek favorite. AMC pulled in 460,000 viewers a night last week, yet earned $196 million in affiliate fees last quarter. If we assume that the average AMC viewer tunes in the same eight times a month, that’s 1.73 million households that watch AMC:

    • Every household pays $0.65 per month for AMC in affiliate fees ($65.3m/100m)
    • Only 1.7 percent of households watch AMC. If AMC were only available a la carte, each of those households would have to pay $38/month in order for AMC to achieve the same revenue numbers they do currently
    • The 98.3 percent of households who don’t watch AMC would only see their cable bills decrease by $0.65 were they able to exclude it

    Both these cases are overly simplified, and make a lot of assumptions, and, crucially, ignore price elasticity: at those a la carte prices, both ESPN and AMC would get a lot less viewers, both decreasing advertising revenue and requiring that much higher of a fee to maintain their current revenues.

    The truth is that the current TV system is a great deal for everyone.

    • Networks earn much more per viewer than would be sustainable under a la carte pricing
    • Networks are incentivised to create (or in ESPN’s case, buy rights to) great programming; making your content “must-watch” lets you raise your affiliate fees
    • Viewers get access to multiple channels that are hyper-focused on specific niches. Sure, folks complain about paying for those niches, but only because they don’t realize others are subsidizing their particular interests
    • Cable companies know the cable TV business, and would prefer to put up with customer disgruntlement over rising prices than become dumb pipes

    Cable TV is socialism that works; subscribers pay equally for everything, and watch only what they want, to the benefit of everyone. Any “grand vision” Apple, or any other tech company, has for television is likely to sustain the current model, not disrupt it directly.

    This is a three-part series.

    • Part 1: The Cord-Cutting Fantasy. Getting only the content you want without paying for everything is a fantasy. Pay TV is socialism that works.
    • Part 2: Why TV has resisted disruption. Great content is differentiated, has high barriers to entry, and depends on networks.
    • Part 3: The Jobs TV Does. The key question is attention, not set top boxes. What jobs do we hire TV to do?

    Also see Steve Jobs on TV, my Apple TV prediction, and my Additional Notes on TV

    1. Update: It’s been pointed out, correctly, that I’m talking about unbundling, not cord-cutting. That’s technically correct. However, I think folks who talk about cord-cutting still want the same content. That’s the fantasy I’m referring too. Still, I regret the imprecision. Thanks to John Feminella for the correction ↩

    2. It’s not; those numbers were prime time only from a random week in May. The total number of households that watch ESPN is surely higher, but that only changes the dollar figure somewhat, not the overriding point ↩