It was very hard to find fault with anything that Facebook announced at F8 last week. Unlike their past developer efforts, which were all about pulling content onto Facebook, this year was about pushing Facebook’s infrastructure out into all kinds of mobile apps. The win for Facebook is that much more signal about their users, particularly about their app usage; the win for developers is being a part of the new Facebook Audience Network. The latter is a very big deal.
One of the key lessons I learned working with developers is that, at the end of the day, everything pales in comparison to the question: “How do I make money?” Developer tools are important, languages are important, exposure is important, but if there isn’t money to be made – or if more money can be made elsewhere – then you’re not going to get very far in getting developers on your platform.
Facebook, meanwhile, is crushing it when it comes to mobile revenue. In the last quarter, mobile ad revenue surpassed non-mobile ad revenue for the first time, bring in nearly $1.3 billion dollars. As I noted last week in a piece on Bloomberg View, “These ad units are largely purchased by free-to-play game publishers such as King (maker of Candy Crush Saga) and Big Fish Games, which leverage Facebook’s incredible demographic data to target the small percentage of players who will spend hundreds of dollars on in-app purchases.”
Both Google and Twitter are looking to edge in on Facebook’s territory; Twitter launched app install ads of their own last week, and Google is doing the same for search and YouTube, with the killer advantage of knowing exactly which apps Android users are already using.
Meanwhile, Google and Apple are both raking in 30% of every virtual sword and extra life, and Apple in particular isn’t shy about talking about it, continually bragging about the amount they have paid out to developers with nary a mention that 95 of the top 100 apps1 are free-to-play.2
So to recount, Facebook is going gangbusters because of ads for free-to-play games, developers are excited about the chance to cash in via Facebook ads, Google and Twitter are trying to mimic Facebook’s success, and Google and especially Apple are hanging their app store hats on the amount of revenue generated by in-app purchases.
App stores take 30% of in-app purchases; the remainder goes to free-to-play publishers like King. These publishers, in turn, drive the majority of Facebook mobile advertising, as that is the best channel to find more digital whales. And now, 3rd-party developers can get their piece.
In other words, billions of dollars in cold hard cash, and 20x that in valuations are ultimately dependent on a relatively small number of people who just can’t stop playing Candy Crush Saga.
Angela Ahrendts officially took over as head of Apple Retail last week, and just in time. Same store sales were down five percent last quarter, and have been hovering around zero for several quarters prior. To be fair, that decline is mostly due to Apple’s slowed growth; more concerning is the declining rate of store openings: 37 in 2011, 40 in 2012, but only 24 in 2013. Most concerning is the paucity of locations in Asia, the fastest growing region in the world; Apple only has 19 stores in Japan, China, and Hong Kong.
It’s easy enough to dismiss the importance of the Apple Stores; after all, if sales move largely in line with Apple’s top-line revenue, surely they are simply another channel, no? Sure, Apple’s relative share for all of its products roughly corresponds to the number of Apple Stores in a particular region, but again, might that not be a trailing indicator?
I would argue no. In fact, as much as people have come to appreciate Apple Stores, I believe that they are not only still undervalued, but actually increasing in importance; moreover, Ahrendts is a potentially valuable addition not just because of her experience opening stores in Asia, but because of the type of company whence she came.
Over the last few years, as Apple has retained its dominance of the high end in all the sectors it competes in, some (not all) former doomsayers have come to begrudgingly accept that perhaps not all consumers are focused solely on price (how said doomsayers manage to ignore nearly every other consumer product category is beyond me). Instead they have seized upon tech’s favorite word “disruption” as the cause of Apple’s certainly impending slide. The argument goes something like this:
“OK, I will grant you that Apple has locked up the premium end of the market. However, even basic smartphones are increasingly ‘good enough’; Apple will soon be over-serving the market. No one will want to pay $650 for a smart phone, no matter the brand, especially if operator subsidies go away.”
Leaving aside the operator subsidy question (I’m of the opinion operators like them more than they let on), this criticism of Apple is sound in theory but mistaken in reality; the truth is that Apple doesn’t sell phones (or computers or tablets); they sell iPhones. And iPhones are not just hardware, but also the software that runs on them. But even that is missing the whole picture. To buy an iPhone is to buy into an experience that includes everything from advertising to following the news to visiting a store to buying a phone to unboxing to downloading apps to visiting a genius and so on and so forth.
It’s no accident that the Apple Store appears twice in that sequence. It’s a critical part of the Apple experience that increases the value of an iPhone (and Mac and iPad) and works in a very specific way to counteract over-serving and help prevent disruption.
In the “Innovator’s Solution,” the follow-on to “The Innovator’s Dilemma,” Clay Christensen diagrammed the process of low-end disruption:
The incumbent product is originally not good enough, but over time it improves and eventually over-serves consumer needs. This leaves room for the good-enough lower-prices new entrant.
The market leader (in this case, the iPhone) starts out not good enough, but better than anything else. Over time it improves, until it perfectly meets consumers needs. However, driven by the need to maintain profit margins and the demands of high-end consumers, the product continues to improve beyond what most consumers value. Meanwhile, new entrants are not as good, but also cheaper; they begin to peel off the lower end of the market, and as they improve, eventually take it all.
Certainly low-cost phones powered by the various flavors of Android have been very successful in the low-end market, and there’s no question that a great many consumers are first and foremost driven by price. However, the iPhone has stubbornly held on to the high end, even increasing its share. As I wrote in What Clayton Christensen Got Wrong:
Not all consumers value – or can afford – what Apple has to offer. A large majority, in fact. But the idea that Apple is going to start losing consumers because Android is “good enough” and cheaper to boot flies in the face of consumer behavior in every other market. Moreover, in absolute terms, the iPhone is significantly less expensive relative to a good-enough Android phone than BMW is to Toyota, or a high-end bag to one you’d find in a department store.
It’s that last example that resonates when talking about retail especially. To buy a designer bag is an event: you’re greeted at the door, given a drink, have an attendant on hand at all times (who will model the bag for you, if need be); if you purchase it’s almost like a ceremony, complete with special packaging, congratulations (for them taking your money!), and perhaps a follow-up call a day or two later. Obviously given its scale an Apple Store isn’t quite the same, but it’s in the ballpark, especially relative to the buying experience for most electronics. Moreover, it’s the after-sale experience that is arguably the best part: you’re given help setting up your new device, transferring files, invited to classes to learn how to use your purchase, and assured that a genius is ready-and-waiting to take care of any problems that arise.
All of this activity surrounding the Apple Store has a direct effect on all three disruption curves:
The “try-before-you-buy” accessibility of the Apple Store raises the customer needs curve
By being able to experience new features in the Apple Store, consumers come to demand those features, effectively increasing consumer needs
My favorite example of this is Facetime when it first launched: Apple actually set up a special 1-800 number that you could call to try out Facetime from any Apple Store. Instantly Facetime moved from being something abstract to being something real, and something you just had to have.
This is an area where Apple Stores are going to be increasingly critical. Our computing devices are becoming more and more personal, particularly the (alleged) iWatch, and making that experience real to potential customers at scale will be a big challenge (this was one of the many reasons why the Facebook First was a failure). This is also an area where the Apple Store has slipped; the TouchID in-store demonstration is pretty weak, in my opinion, especially compared to the Facetime example. Still, thanks to its stores Apple is alone in its ability to make these kinds of features must-haves.
In-Store education lowers the Apple products’ feature curve
Workshops and Apple Store employees enable consumers to use more features; previously unused features (that would have been over-serving) now are consumer needs
Although Apple is famous for its focus on simplicity, the reality is computers are complicated, and that includes iOS devices. It’s very easy for less tech-savvy consumers to never really use a large percentage of their device’s capabilities, increasing the risk that they see the price premium as not being worth it (leaving aside the fact the cheaper products are usually more complex).
Enter Apple Store Workshops. One-to-many classes are available for free, and one-to-one for $99/year. I’m sure few of you reading this have even given these classes a second-thought, but my dad sure has; they completely changed his relationship with the iPad I gave him, and became something he really looked forward to. He told me, and I quote, “It’s the first time in my life I haven’t felt like an idiot [with a computing device].” And, ever since, he’s been counting the days until he can get what-he-previously-considered-to-be-an-overpriced iPhone. It’s worth it, because he knows he can learn how to use everything it has to offer.
The Genius Bar “safety-net” lowers the relative value of low-end products
The lack of something similar to the Genius Bar makes low-end products a much less attractive alternative
I don’t know about you, but one thing I’ve realized as I’ve gotten older is that the non-technical dislike calling you for support just as much as you dislike being called. That’s one of the biggest reasons why it’s hard to overstate the impact of the Genius Bar. Even if you never visit, the knowledge that you can if you buy an Apple product, but that you can’t if you buy another, significantly diminishes the relative value of the competing product. Numerous industries have been built on the premise that people will pay for peace of mind, and the Genius Bar is no different. The lack of something similar means that competing products may be good enough from a feature perspective, but in the full calculus of the overall ownership experience never can be.
What is particularly compelling about each of these factors is that they work to Apple’s advantage even if you don’t buy your Apple product from an Apple Store. You can try out a product there, then order it online. You can take a class with a second-hand device, and you can visit the genius bar no matter what. Thus, I don’t think looking at direct Apple Store sales fully captures the impact they have on Apple’s business.
That said, anecdotally speaking (albeit echoed in numerous places), visiting an Apple Store is not quite the experience it once was. Many are crowded, it’s confusing to check out, and the product presentation is feeling a bit tired. There is significant room for improvement in current stores, improvements that makes them feel even more like the premium retailers they are. Enter Ahrendts, recently-departed CEO of Burberry, purveyor of the sort of experience the Apple Store has long emulated.
I actually agree with the consensus that Ahrendts success in Asia broadly and China in particular were major factors in her hiring, but don’t discount what she might improve in the stores that already exist. While I disagree with those that say Apple’s disruption is imminent, I’m not one to ignore the possibility; I do think, though, that even these more nuanced doomsayer serially underestimate the totality of the Apple experience, of which Retail is and will continue to be a major part.
Twitter’s unconventional path is well-documented at this point. From failed podcasting company to playground sketch (actually, probably not) to a revolving door of CEOs fueled by founder and board infighting has emerged what is, even after yesterday’s stock plunge, a $23 billion company. And, more importantly, a product absolutely beloved by many of its users, including me. You could argue it’s the canonical example of how nothing matters but the product.
Maybe.
One of the most common Silicon Valley phrases is “Product-Market Fit.” Back when he blogged on a blog, instead of through numbered tweets, Marc Andreessen wrote:
The only thing that matters is getting to product/market fit…I believe that the life of any startup can be divided into two parts: before product/market fit (call this “BPMF”) and after product/market fit (“APMF”).
When you are BPMF, focus obsessively on getting to product/market fit.
Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.
When you get right down to it, you can ignore almost everything else.
I think this actually gets to the problem with Twitter: the initial concept was so good, and so perfectly fit such a large market, that they never needed to go through the process of achieving product market fit. It just happened, and they’ve been riding that match for going on eight years.
The problem, though, was that by skipping over the wrenching process of finding a market, Twitter still has no idea what their market actually is, and how they might expand it. Twitter is the company-equivalent of a lottery winner who never actually learns how to make money, and now they are starting to pay the price.
The price I’m referring to is the truly disconcerting slowness in user growth and engagement that Twitter reported earlier this week. Twitter reported they increased monthly-active-users (MAUs) by 5.8% from the previous quarter, and 25% year-over-year (YoY), and that timeline views increased 15%. That was down from a 30% YoY increase in MAUs and 26% increase in timeline view last quarter. On the flipside, Twitter posted excellent financial numbers, increasing revenue by 119% YoY, and increasing their ad revenue per MAU by 65%. This too, though, is very unconventional. Ad-supported services are supposed to grow their user base first, and then figure out how to monetize later.
If an advertiser wants to reach someone like me – and they certainly do, given my spending habits – Twitter is by far the best way to find me. Were Twitter able to consistently capture this signal and deliver effective ad units that caught their user’s attention, they could command some of the highest average revenues per user on the Internet.
The problem for Twitter is that getting a user as finely tuned as myself is not at all an easy process. My interests are so easily identified because I constantly edit who I follow to make sure my signal-to-noise ratio is as high as possible. However, this sort of behavior is totally unnatural and overwhelming to a new user. I hesitate to tell others how valuable I find Twitter, simply because I don’t know how to explain to them how to make Twitter as useful to them as it is to me.
Nothing has really changed: Twitter continues to know a lot about me and other heavy users, and is figuring out how to monetize that, but there just aren’t enough people like me. I know Twitter is trying to spin MoPub as giving them access to a billion users, but without the data derived from Twitter usage, those billion users and the ad impressions they see are just more undifferentiated inventory; there’s a good reason display ad companies are worth a lot less than social network ones.
What Twitter has is a marketing problem. To be clear, while advertising is a part of marketing, marketing is about much more than advertising. It’s also about understanding your market, what their needs are, and how your product meets those needs. I continue to see little evidence Twitter has any idea, and I think their accidental success is largely to blame.
An interesting side effect of Twitter’s inability to articulate their core value prop is that anyone and everyone has advice for how they might improve (including me!). Combine that with the fact that Twitter serves so many different use cases – real-time news, de facto RSS reader, public chat, just to name a few – and you have a paralysis of choice not only for new users but also for Twitter’s marketing and onboarding teams.
So why not embrace the complexity? Instead of trying to teach new users how to built a curated follower list, build the lists for them. Don’t call them lists, though; embrace Twitter’s TV connection and make them “channels.” Big basketball game? Go to the basketball channel, populated not with the biggest celebrities but with the best and most entertaining tweeters. Build similar channels for specific teams in all sports. Do the same for Apple, Google, and technology; liberals, conservatives, and politics in general; have channels for the Oscars, the Olympics and so on and so forth. And make them good, devoid of the crap that pollutes most hashtags and search results. If the ideal Twitter experience is achieved with a curated list, then provide curated lists and an easy way to switch among them.
Now you have a value prop: easily join the conversation about what is happening in the areas you care about, without the months-long process of building a perfectly customized Twitter feed. Oh, and by the way Ad Person, here is a very easy-to-understand ad unit built around a specific topic filled with self-selected followers.
Sure, this is a bit of a dramatic change, but there’s no need for individualized timelines to go away. More importantly, Twitter needs to do something dramatic. $250 million in revenue is nice, but:
Twitter: $250M revenue & 198M mobile users
Line: $338M revenue & estimated 185M mobile users
Ad-based monetization not such a great model.
LINE is mostly strong in countries that Twitter isn’t, but the important point is that more and more channels are competing for advertiser’s dollars. Twitter is in real danger of being reduced to a niche; useful for reaching a specific type of audience, but an afterthought for meaningful ad spending, and that certainly is not worth $23 billion.
Twitter is truly a special company with a special product, but not even they can escape the fact that product is a necessary but insufficient ingredient. Market matters, and it’s past time Twitter found theirs.
Payments are one of the eternal tech rainbows,1 enticing startups and established companies alike with the promise of priceless data and incredible volumes. Many who dive in, though, like Google with Wallet, find it’s incredibly tough going. Square, for example, is burning through cash and may be acquired whether they want to be or not. From the WSJ:
With losses widening and cash shrinking, representatives of mobile-payments startup Square Inc. have discussed a possible sale to several deeper-pocketed rivals, according to people familiar with the matter…
Square recorded a loss of roughly $100 million in 2013, broader than its loss in 2012, according to two people familiar with the matter.
The five-year-old company paid out roughly $110 million more in cash last year than it took in, according to two people familiar with the matter. Over the past three years, the startup has consumed more than half of the roughly $340 million it has raised from at least four rounds of equity financing since 2009, two people familiar with the company’s performance said.
There are two broad categories of payment “opportunities”: building on top of credit cards, and replacing them. Square falls into the former. The challenge here is that margins are incredibly tight. Consider a $50 transaction paid for with a Visa card swiped through a Square reader:
The interchange fee (which goes to the card-issuing bank) for swiped Visa cards is 1.51% + $0.10, which in this example is $0.855
Various assessment charges (where Visa actually makes its money) come to ~.11% + $.03, which in this example is $0.085
Square charges merchants 2.75% for swiped cards, which in this example is $1.375
Square’s final takeaway is at most $0.435.2 Were the card issued by American Express, Square would actually lose money (assuming a $1.75 fee from a 3.50% discount rate).
Those aren’t great margins, to state the obvious.
Yet Square cannot really charge more. Credit card processing fees are one of the largest expenses a business faces3, and every percentage point increase is a significant incentive for said business to go to the trouble of setting up and managing their own merchant account.
This is the blessing and curse of building on credit cards: you get instant ubiquity, but massive competition. The end result means Square is unprofitable, and getting the scale to make these numbers work – or, as Square tried to do, the user experience that makes paying these fees worthwhile – is a challenge that would be faced by anyone looking to build a payment system on top of credit cards, including Apple, Amazon, or Google.
The alternative is to go around credit cards and build something completely new. This leaves much more room for a sustainable margin, but then you’re left with the absolutely massive network problem. If you think getting a social network off the ground is hard, when the only obstacle is getting people to enter in an email address and password, imagine having to simultaneously distribute a means of accepting payments to merchants and a means of making payment to consumers, all at the same time, because if you only have one you basically have nothing.
This is why I, for the foreseeable future, expect to see little if any progress in the United States.
Note the caveat, though: “in the United States.” The problem with building a new payment system or service in the US is that credit cards, all things considered, aren’t that bad. Sure the fees are high, but the network problems are largely solved; rare is the location where you can’t use a credit card (and almost always by the merchant’s choice), and almost all consumers have one. Small wonder, too: the benefits of credit cards relative to checks and/or cash far outweighed the pain it took to roll them out:4
When the benefit (vertical distance) is greater than the pain (horizontal distance) of establishing a new network, a new technology can breakthrough. However, if the benefit is only incremental, then the status quo is likely to prevail.
This is much less the case when it comes to alternative payment methods. The pain of establishing a new two-sided network remains just as significant, but the upside to the new payment systems relative to credit cards is much less than the benefits of credit cards relative to cash.
That is why the most interesting places to think about when it comes to new payment systems are countries with low credit card penetration. Here in Taiwan, for example, when I first arrived in 2003 almost everything was cash only.5 Just a year earlier, however, in 2002, the EasyCard Corporation née Smart Card Corporation had rolled out an RFID stored value card for use on Taipei’s new MRT (subway) system with the ability to add cash to your account at any convenience store or MRT station. Within a few years you could use the card everywhere: buses, trains, taxis, parking, government fees, and now, 10 years on, almost every retailer, and the RFID chip is no longer limited to cards, but is embedded in some phones, key fobs, and more. The EasyCard was modeled on Hong Kong’s Octopus card, which is even more ubiquitous in Hong Kong retail; the common thread in both systems was significantly lower credit card penetration relative to the US.
The point is not to say that RFID stored-value cards are the future (although they are much more merchant-friendly than credit cards). Rather, the reason that contact-less payment systems have taken off in sectors beyond transportation is that their relevant competitor was the obviously inferior cash, not the slightly less-good credit card. The gain was worth the pain of creating a new two-sided network of merchants and consumers.
The broader takeaway, though, is that more and more breakthroughs, especially those that involve significant network effects, are likely to come from outside the United States. You already see this in the messaging space:
SMS is effectively free for most American’s on post-paid plans
SMS is charged on a per-message basis in many other parts of the world
Ergo, services like WhatsApp and LINE take off in non-US markets where they are a massive leap in value relative to the status quo and are worth the pain of getting all your friends on board
The vast majority of IT innovation over the last two decades has started in the US, and the quality of services available to the US consumer is now quite high; this means the hurdle for something new to breakthrough is higher still. In many other parts of the world, though, which are only now getting connected – and usually via a smartphone, not a PC – there are all kinds of opportunities that are leaps and bounds better than what was previously available, even as they aren’t enough of an improvement over the US status quo for consumers in the US to care. Relativity matters, and both investors and startups would be well-served by looking for geographies where their ideas have leapfrog potential.
When people think about the first iconic Apple product, it’s probably the Macintosh that leaps to mind. But Apple Computer was actually built on the back of the Apple II. In fact, for quite a long while it was the Apple II that provided the profits that made the Macintosh possible, as Guy Kawasaki recounts:
(Note: Ironically, the video doesn’t work on an iOS device; is Vimeo really flash only? Anyhow, the video isn’t essential for the article)
If you squint you can see the parallels between the Mac and the iPad (although the iPad already provides far more revenue and profits than the Mac). In both cases you have the new machine, with a new interaction model, not selling as well as many think it ought to, and the same prescription for both: make it more like the old thing.
The Macintosh was eventually able to run Apple II software with the release of the Apple IIe card, but that actually had nothing to do with why the Macintosh finally broke through as Apple’s primary moneymaker. Rather, it was the advent of desktop publishing, made possible only because of the Mac’s unique GUI and mouse input. To put it another way, the Mac was legitimized by a type of application that could not have existed without the Mac, and thus, by definition, came along several years later.
This is worth keeping in mind when it comes to the iPad. After explosive early growth that outpaced even the iPhone the iPad has stalled, to put it kindly. Last quarter Apple sold 16.4m iPads, a 16% drop-off from the year-ago quarter. While a good portion of this difference was due to a different inventory situation after last year’s Mini shortage,1 even the most positive spin is one of no growth. And, predictably, the Internet is full of advice.
Jean-Louis Gassée got things started in earnest with an article entitled The iPad is a Tease:
The iPad represents about 20% of Apple’s revenue; allowing iPad numbers to plummet isn’t acceptable. So far, Apple’s bet has been to keep the iPad simple, rigidly so perhaps, rather than creating a neither-nor product: No longer charmingly simple, but not powerful enough for real productivity tasks. But if the iPad wants to cannibalize more of the PC market, it will have to remove a few walls.
Specifically, the iPad is a computer, it has a file system, directories, and the like — why hide these “details” from users? Why prevent us from hunting around for the bits and bobs we need to assemble a brochure or a trip itinerary?
This sounds suspiciously like the recommendation that the only thing holding the Macintosh back was its inability to run Apple II programs. It’s also of a piece with the vast majority of geek commentary on the iPad: multiple windows, access to the file system, so on and so forth.
I also think it’s misplaced.
The future of the iPad is not to be a better Mac. That may happen by accident, just as the Mac eventually superseded the Apple II, but to pursue that explicitly would be to sacrifice what the iPad might become, and, more importantly, what it already is.
There is nothing in life that is not a tradeoff. My favorite example of this is multitasking in iOS. Up until iOS 4, when you exited an iOS app, it closed down completely; when you returned, you were back at the first screen. With iOS 4, your app’s state was finally kept in memory; for at least the last few apps, going back meant returning to the exact same spot you had left. An unequivocal win, right?
Well, no. iOS 4 came out in 2010, when my daughter was 3 years old, and for her it was a major step back. She had learned of her own volition that, whenever she didn’t know what to do – like how to leave a playing video, for example – all she needed to do was press the home button and restart the app; now she was back at a familiar place and could go where she wanted, such as to another video. After the update, though, it was incredibly enlightening to see her grow frustrated with my iPhone; her “Get Out of Jail Free” card – the home button – was no longer her saviour, because the app put her right back in the place she was trying to leave. That was the multitasking tradeoff.
To be clear, I think that was a tradeoff worth making. But I’m much less sure about other “features” that geeks are clamoring for, like multiple windows and access to the file system. It’s the absence of these features that makes the iPad so accessible to so many who have never felt comfortable with traditional computers; there is always a cost to complexity. Moreover, for those geeks clamoring for Mac features, why not just use a Mac? It was built explicitly with multi-windows, access to the file system, and a WIMP interface in mind, and the Mac hardware line right now is absolutely fantastic (and will be even better if WWDC features a Retina MacBook Air). Let the iPad be the computer for those for whom computers are too much, even if this population by definition isn’t likely to upgrade frequently.
That, though, is not the end game for the iPad, at least in my opinion. What I am most excited about are the new things the iPad will enable that simply wouldn’t have been possible on the Mac, just like desktop publishing wasn’t possible on the Apple II. We already see hints in specific niches, like art, music, and gaming. Apple’s ads point to some of these as well, featuring everything from photography to windmill maintenance to sumo wrestling. Obviously none of these have broken out to the degree necessary to drive significant growth, but the iPad has only been on the market for four years; the fact it’s already significantly outselling the Mac puts it far ahead of the Mac relative to the Apple II, and use cases need time to catch up with brand new possibilities.
Apple, though, does deserve some of the blame for the slower development of these new opportunities. Their reticence in enabling sustainable businesses on the app store makes building a business on apps, particularly new-to-the-world concepts, a risky proposition. This is unfortunate; after all, it was a 3rd party – Adobe – that truly drove desktop publishing. Unfortunately, the way Adobe treated Apple in the late 90s likely contributes to Apple’s current attitude towards developers, but it’s to Apple’s own long-term detriment.
Still, though, Apple has done well to preserve the structural simplicity of iOS,2 and I strongly urge them to keep that simplicity as their northern star, stalled growth and geek demands be damned. Something will sell iPads, and if you criticize me for not knowing what, then criticize all those who couldn’t have imagined desktop publishing in 1984.3
I know this sounds like Tim Cook making excuses, but it’s a very real thing ↩
Even though the reduction of affordances in iOS 7 made the operating system unnecessarily harder to use ↩
I do think there is a very real question about the cannibalistic effect a large-screen iPhone will have on the iPad; Apple’s response should be to better incentivize developers to build new iPad use cases, not to make an iPad like a Mac ↩
They certainly have great technology, but to call them a technology company doesn’t seem quite right. They have great marketing, but to call them a marketing company isn’t true either. They have an incredible retail chain, but to call them a retailer is clearly off base as well.
You could ask a similar question about Nike.
They started with shoes, but their product line has extended far beyond that. Certainly they are a marketing company, one of the best in the world, but they also make many genuinely innovative products. Over the last few years they’ve been expanding their push into software and wearables, yet no one thinks of them as a technology company. And, despite self-owned and franchised stores in almost every neighborhood in the world,1 no one thinks of them as a retailer either.
Interestingly, both Apple and Nike have markedly similar business models: as various pundits never tire of telling us, Apple is selling a commodity and is doomed to inevitable margin pressure and/or massive loss of share in the face of good-enough cheap Android. For better or worse we in tech are stuck with these folks, because who knows what they would make of a company like Nike, selling pieces of leather and bits of fabric. Talk about a commodity! And yet, there is Nike, sporting a ~45% gross margin in an industry that averages 33%. Clearly they are more than just an apparel maker.
My wife just registered for the Nike Women’s Half Marathon here in Taipei; in order to register, you had to have logged at least 50km using the Nike+ Running App over the last month; immediately after registering you were presented with specially made products featuring the race logo. Typing that out sounds, well, rather annoying, but the reality was quite the opposite. My wife downloaded the app, clocked up the miles, counted down to the deadline, and joyfully bought a new pair of running pants (I was impressed at her restraint). It was fun.
What Nike is selling is the experience of being a runner (or a basketball player or a tennis player or a golfer, etc.) It’s not just the athletes in their advertisements, or the quality of their shoes, the sportiness of the clothes, or the sophistication of the apps. It’s the whole, and it’s greater than the sum of its parts. Nike is an experience company. They sell a commodity product, and make their profit off of the differentiation provided by the Nike experience. And they’re better at it than just about any company in the world, except maybe Apple.
After all, Apple too is an experience company. They are not selling you a computer, or a phone, or a tablet; they are selling an experience that encapsulates everything from their ads to their stores to their packaging to the actual user experience of their devices. They sell a commodity product, and make their profit off of the differentiation provided by the Apple experience.
Serving on corporate boards is fairly common for C-level executives, but not at Apple under Steve Jobs. To my knowledge the only exception was Tim Cook, who joined Nike’s board in 2005.2 A year later Nike and Apple released the Nike+iPod, a hugely successful collaboration that made an iPod Nano about as omnipresent as a water bottle for a great many runners, and a pair of Nikes the default choice for anyone with an iPod.
Since then the collaboration has continued, especially with the FuelBand, which has an app only for the iPhone, along with significant shelf space in Apple Retail stores. Of course the FuelBand also always seemed a potential stumbling block: would Tim Cook really release a competing product (the alleged iWatch) to the company on whose Board he sat?
Well, now that stumbling block is gone: CNET reported over the weekend that Nike fired a majority of the FuelBand team and will stop making wearable hardware:
The company informed members of the 70-person hardware team — part of its larger, technology-focused Digital Sport division comprised of about 200 people — of the job cuts Thursday. About 30 employees reside at Nike’s Hong Kong offices, with the remainder of the team at Nike’s Beaverton, Ore., headquarters.
Nike’s Digital Sport hardware team focused on areas like industrial design; manufacturing operations; electrical and mechanical hardware engineering; and software interface design. Products included not only the FuelBand but also the Nike+ sportwatch and other, more peripheral sport-specific initiatives.
First off, I highly doubt this was directly connected to Apple. By all accounts the FuelBand was a money pit and the Secret thread that first revealed the firings suggested the same. Secondly, the FuelBand was interesting in a product sense but didn’t make much business sense for Nike. It didn’t lead to the direct sale of any of their products, since it was meant for wearing around the home and office; relatedly, while there may have been some brand utility in people sporting a Nike+ wearable, a product meant to make you take the stairs doesn’t exactly remind you of an athletic lifestyle.
All that said, Nike can read the rumor sites just as well as we can, and do happen to have particularly special access to Tim Cook and a history of partnering with Apple. And Apple is certainly better at “industrial design; manufacturing operations; electrical and mechanical hardware engineering; and software interface design.” I would not at all be surprised if Nike were happy to cast aside the FuelBand in favor of recreating the Nike+iPod with the (alleged) iWatch.
The question, then, is were such a partnership to come about, what might Apple gain from Nike? Obviously we are well into the realm of speculation, but certainly the biggest question about a potential iWatch is what job it might do. And, perhaps, it really is there right in front of us.
Think about the iPhone: before it could make a call or go on the Internet, there was the iPod, which did nothing more than play music. But the foundation built by the iPod, iTunes, and the iTunes Music Store helped the iPhone tremendously, leading not only to software innovations like the App Store, but also hardware breakthroughs in miniaturization and battery life. You have to start somewhere.
So it is with a wearable. It’s not too difficult to imagine a future where your wrist is the center of your digital life, projecting a contextually appropriate user interface to the nearest dumb screen, but it’s even easier to see how that’s just not possible now – just like the iPhone wasn’t possible when the iPod launched in 2001. But you have to start somewhere.
So then, if you want a beachhead, is there a population that is already in the habit of wearing electronic accessories and loves measuring themselves? And, if you wanted the absolute best chance of winning that market, might you not want to partner with the company that sells the experience you want to provide?
Truthfully, the only reason to think Apple might not want to partner with Nike in this way is, well, because they’re Apple. But remember, Apple was quite pleased to launch the iPhone with Google services,3 and has cooperated with Microsoft for years; they’ve also long had by far the best and most comprehensive content deals. Apple’s business development acumen is one of its least appreciated competitive advantages, and their products are better when it is utilized. I bet that’s exactly the case with the iWatch.
There are five Nike-branded locations I can think of off the top of my head within a kilometer of my house, none owned directly by Nike ↩
Eddy Cue joined the Ferrari Board of Directors in 2012 ↩
I hope you will forgive one more solipsistic post; I’m as eager as you to get back to the kind of writing that you are here for.
First off, thanks for your support. I’ve been pretty overwhelmed with the number of signups so far; it’s a great affirmation of what I’m doing here.
As expected, launching a membership program has not been without its hurdles; beyond the payment gate snafu, there has been lots of folks that have expressed concern about my erecting a “paywall,” cutting them off from content they had come to expect.
My sincere belief is that this is not a paywall, which I view as being punitive and arbitrary. Instead, I wanted memberships to be additive, giving my most loyal readers more and different premium content, while the long-form articles this site is known for remained free.
It was, however, around the 10th time I was explaining this that I realized I was making the most classic of mistakes: blaming the customer for my complexity.
The truth is while I perfectly understand the distinction between content types, I am also heavily invested in that understanding: after all, it’s my livelihood. My readers have busy lives with their own cares and worries particular to them, and to assume they would take the time to understand what I am selling was unfair to them, and ultimately, unfair to me as a proprietor.
To that end, I am making a change to the membership plans, specifically the additional content portion:
The Linked List Content Will Become the Daily Stratechery Email
The additional premium content that I plan on writing daily (~3-4 500 word items) will be moved to a daily email, fresh in your inbox every morning (an advantage of being 15 hours ahead).
This has lots of advantages:
If something is on this site, it’s free to read and share. Period.(Update 4/30/14: At the request of members, I’ve archived the daily updates to the side. However, they will not appear in the main feed and will have no impact on the experience of non-members) No need to think twice or wonder if your friend or coworker will be able to read the link you share, which ultimately, helps me grow.
What I am selling will be much clearer and easier to explain: a daily email, with my opinion on the most important stories and articles of the day. It’s something that doesn’t exist now, but will if you pay for it.
Significantly reduced complexity in the design of the site, including a return to one full RSS feed.
There are disadvantages:
I’m changing what I sold. If anyone strongly prefers the linked list and objects to receiving the same content in email, I will gladly refund your money.
I’m removing the additional traffic on site that would have been generated by the daily content, which may affect sponsorships. To that end I’m also reducing the sponsorship price to $750.
It will be much easier for people to share premium content. Once or twice would be ok, but I trust my readers would not do so systematically.
The price will remain $100 a year with gifts or $10 a month. The signup flow is the same – I automatically enroll you when you buy a membership.
The Conversation Plan
I’m changing this to the t-shirt plan and reducing the price: $30 for the year with a t-shirt, $3 a month without. I will issue refunds to those who have bought conversation plans (but there were many fewer than the other plans).
The Community Plan
No changes. I’m very happy with the response and can’t wait for our first meetup. Email and Glassboard access coming soon (it’s been one of those weeks).
Donations
I’ve received several request for a donation option, and will offer one soon.
Also, please note it will take a few days to incorporate these changes fully, but I wanted to make this announcement sooner rather than later.
It’s humbling to, on one hand, preach clarity in product offering and the importance of clear value propositions in my articles, and then stumble when it’s my turn. However, I think flexibility of mind and action are important as well, and I hope I’ve demonstrated that.
Above all, though, I want to express how grateful I am for the many who have already bought in. I aim to make it a bargain – and a less confusing one at that!
If you haven’t signed up, and don’t intend on it, I still welcome you as a reader and hope you will continue to share content you like. Again, everything on this site is free. If you’d like to come on board and get that daily email, or access to me, or just a t-shirt, the membership page is here.
Thanks so much for your support. I look forward to getting back into the tech next week.
The main takeaway of these pieces was that the Internet, with its wide reach and low costs, is fantastic for writers, but a very difficult environment for newspapers with their high fixed costs. It’s also great for readers, who can follow specific writers instead of broad-based publications focused on the lowest common denominator.
While these pieces stood on their own, the truth is the thinking behind them was not at all abstract: it is the foundation of the new Stratechery, launching today.
At Stratechery, I want to build a site that enables me to focus on writing in a way benefits not just myself but my readers as well. To do that I’ve focused on building a freemium model that will allow me to focus on writing, grow my audience, and reward those who want to join the conversation, get more content, or create a community.
This is how it will work:
The twice-weekly articles (usually fairly long) that I have been writing for over a year will continue, and will always be free. They will be sponsored on a weekly basis by advertisers who wish to reach the Stratechery audience of VCs, tech company executives, and technologists around the world. Sponsorships will appear on the front page and at the bottom of every article across the site for a week
For those who value Stratechery highly, I am offering three membership options that are all accretive in value:
Join the Conversation membership level ($5/mo or $50/year) and gain the ability to comment on articles. Those who join for a year will also receive a Stratechery t-shirt
Join the Content membership level ($10/mo or $100/year) and, in addition to Conversation privileges, gain access to new daily content by me. This content will primarily take the form of a linked-list, where I link to articles of note with an excerpt and one to two paragraphs of analysis. Those who join for a year will receive both a Stratechery t-shirt and a poster of the The Social-Communications Map
Join the Community membership level ($30/mo or $300/year), and, in addition to Content privileges, gain direct access to me and to other Community members via email, a private message board, and both virtual and in-person meetups around the world. Those who join for a year will receive a t-shirt, poster, and a Book by FiftyThree of Stratechery drawings
With this model I am hopeful I can make a living, increase my audience, and reward those who value my writing the most. None of this would be possible without the Internet, and if I am successful, I hope Stratechery will stand as an example of the positive and transformative effect the Internet will have on writers and writing everywhere.
Thank you in advance for your support. You can learn more about the membership model and signup here.
Last Thursday, after waking up to the news of Dropbox’s most recent announcements,1 I couldn’t have been less impressed. To quote myself from a chat I had with a friend: “Dropbox is an unfocused mess.” But then I actually watched the event.
I’ve long been a believer in cloud storage; back in college I experimented with storing files on shared hosting (and accessing them via FTP!), and was a day one subscriber of Amazon S3. I couldn’t have been more excited when Dropbox was launched in 2008, and not only moved my personal files to it but also used it to build a syncing system for a computer-based teaching system I had developed.2 At business school I would conservatively say I was responsible for 50 new Dropbox customers, and I’ve had the 100GB plan ever since it was available. As a consumer, I’m a fan.
The entire premise of this blog, though, is to take off the consumer product-focused hat, and instead look at the larger strategic picture and business fundamentals. On the first point, I’ve long been and remain very bullish about cloud storage as a business. Forgive the stretched analogy, but in a lot of ways cloud storage is to the enterprise as messaging, the other emerging category I’ve followed with interest, is to consumers.
Messaging targets what is most important to consumers: their communication with their friends and family (in many ways it is our connections that define us). Corporations, though, are defined by the sum of people, processes, and priorities, represented as data.1 This makes storage of that data equally indispensible.
Because they are the locus of what matters to our “real” life, messaging apps are a tremendous platform for all types of value-added services, ranging from stickers to better express ourselves, to shared entertainment (with oh-so-alluring in-app purchases), to an easy way to manage the day-to-day friction of life, from taxis to dining to buying something special.2 Similary, because cloud storage contains the data that for all intents and purposes is a corporation, it too is a fantastic platform opportunity for all types of value-added services, including specialized applications, appliances, and other cloud services.3
From a product perspective, both messaging and cloud apps are relatively simple and on their way to being commoditized. There are high double-digit messaging services with more than 10 million users, and all of the major tech players are driving the cost of cloud storage to zero. This means that differentiation will not be achieved through technical acumen alone.
This final point has, at least until the last few months, led many to dismiss both messaging and cloud services from a business perspective. However, what more and more people are realizing is that both deal in incredible scarce resources: attention, in the case of messaging, and perfectly unique data4 in the case of cloud storage.
You’ll note, of course, that I explicitly talked about storage in the context of the enterprise; the problem for Dropbox is that while they have a fantastic consumer product, they have traditionally not focused on businesses, the main category that has demonstrated a willingness-to-pay. As I wrote in Battle of the Box:
Dropbox’s model makes sense theoretically, but it ignores the messy reality of actually making money. After all, notably absent from my piece on Business Models for 2014 was consumer software-as-a-service. I’m increasingly convinced that, outside of in-app game purchases, consumers are unwilling to spend money on intangible software. That is likely why Dropbox has spent much of the last year pivoting away from consumers to the enterprise.
To that point, Dropbox held an event last November to announce their new Dropbox for Business. Last Thursday I actually watched the video of this event (thinking it was last week’s event), and it couldn’t have been a more dreary affair: Drew Houston interminably telling (again) the story of Dropbox’s founding, followed by an awkward segue into the introduction of basic business features that only scratched the surface of what enterprises truly need in a cloud storage solution.
The beginning part of this week’s event wasn’t much better. An uninspired rehash of Dropbox for Business and a recreation of functionality Sharepoint has had for years were, for the business model side of me, all that mattered, and they were nice, but nice doesn’t get you far. Not helping matters was the Mailbox demo: while Auto Swipe was very cool, Mailbox isn’t even close to being a real enterprise solution (it was telling that Mailbox for Desktop was demoed on a Mac5). Mailbox, at least, fits my initial reaction: a distraction.
But then came Carousel.
First, off, let me clear: Carousel looks amazing. But what was far more impressive, and telling in my mind, was the way in which Houston talked about the problem Carousel was meant to solve. You could feel his angst at the millions of photos we collectively are losing for lack of management, and his giddiness at what they had come up with. And, this is where I take off my business and strategy hat and speak with my heart: it was genuinely touching, and inspirational.
Touching and inspirational, unfortunately, don’t get you far in the enterprise; touching and inspirational, though, matter more than anything in the consumer space. Last week’s event made this eminently clear: Dropbox’s soul is that of a consumer company,6 not an enterprise one. And that matters.
From a purely objective business-minded basis, Dropbox is not only right to pivot to the enterprise, but are in fact wasting their time with products like Carousel. However, as I’ve written previously, it’s better to change your strategy than to try and change your culture. Business is not a game played by robots; it’s about real people building products that they believe in, and this presentation has completely changed my mind: Dropbox should build products for consumers, with just enough business icing to let IT look the other way.
The rub, as I noted, is that it is difficult to see how Dropbox earns its $10 billion valuation while competing head-on with Google and Microsoft, whose business models entail driving the cost of storage to zero. It’s clear Dropbox has long seen photos as a potential lever, going so far as to degrade the user experience of their apps with constant badgering to automatically import your photos (and thus push you past your free 2GB allotment). Carousel is a much better effort in this regard; storage will be free unless it is differentiated, and Carousel does just that.
Product alone, though, does not win in the consumer space; marketing is equally if not more important, and Dropbox does not have the most inspiring history in that regard.7 I actually think this presentation was a good start, although the video promoting Carousel was far more compelling in the context of the presentation than it was when I watched it in isolation. The issue, though, is that marketing takes significant investment, both in talent and in resources, yet Dropbox is funneling most of their money into the aforementioned business product.
My initial worry for Dropbox, then, still stands. I don’t think you can be both an enterprise and a consumer company, particularly in a space as competitive as cloud storage. Dropbox needs to pick a direction and go all out, and, in this case (and in opposition to where I stood a week ago), it appears they have gone with their heart.
My data is irreplaceable, even as data in a general sense is a commodity ↩
Not to mention the fact that only Mac’s have a good-enough trackpad for Mailbox’s gestures; I have yet to use a decent trackpad on Windows, and I’ve used a lot of Windows computers ↩
Steve Jobs should have paid whatever it took to acquire Dropbox in 2011; it’s a nearly perfect match. Consumer at the core, like Apple, with expertise in Apple’s biggest product weakness. ↩
Two things about that post:
I actually wrote that on another blog, which I imported to Stratechery to flesh it out at the beginning
While I stand by my criticism about syncing laptops and desktops, clearly sync is critical when it comes to “computers,” which, of course, includes phones and tablets ↩
I’m based in Taiwan, 15 hours ahead of San Francisco ↩
Probably not the best idea, considering it was still in beta, but Dropbox, along with a bit of AppleScript, continues to do the job perfectly ↩
This week Twitter was abuzz with the most recent report from Flurry that showed people spending most of their time on mobile using apps, not the browser:
Many were quick to once again declare “The Web is Dead,” but I’m not sure that conclusion makes sense, at least for publishing.
First off, Flurry’s numbers don’t account for webviews within mobile apps. On my site, Stratechery, 37% of my iOS traffic comes from webviews (Android doesn’t break out the difference), which on Flurry’s chart would fall mostly in the Twitter slice. More mass market sites likely take up some percentage of Facebook time, as well.
That said, it’s striking how little written content appears on Flurry’s chart; the only category that is primarily about written content is news, and even that includes video. And yet, pageviews on WordPress.com and Jetpack are up 27% year-over-year, new sites ranging from small blogs like Stratechery to huge sites like FiveThirtyEight continue to launch and grow, and multiple startups (and competitors!) continue to find writing something worth investing in.
So is the web dead or not?
I don’t think so, for a few reasons:
The total amount of time spent on a computing device (especially mobile), has and continues to grow significantly. This means that many of the activities on our phones, app or not, are additive to what we previously used a computer for. This makes sense: what makes mobile such a big deal is that instead of a computer being a destination device, it’s now a companion that goes with us everywhere. This is how you square the fact that apps seem to dominate usage even as writing on the web continues to grow. When the entire pie is huge and getting bigger, the total size of any particular slice grows as well, even if it becomes relatively thinner.
Although apps take up a huge percentage of total time, a significant percentage of app time is dominated by just two categories: games (32%) and social networks and messaging (28%). In fact, the more interesting juxtaposition raised by Flurry’s numbers is not apps versus web, but games and social versus everything else.YouTube and other entertainment apps form a solid percentage of what is left (8%), but the remainder is a mishmash of utilities, productivity, the aforementioned news, and, of course the web, which could be anything and everything.
The single most exciting development when it comes to writing on the web is the democratization of publishing. It it now trivial to start a blog, whether on WordPress.com or another provider, and that has led to an explosion of content. As I wrote on Stratechery in FiveThirtyEight and the End of Average:
Most of what I read is the best there is to read on any given subject. The trash is few and far between, and the average equally rare. This, of course, is made possible by the Internet. No longer are my reading choices constrained by time and especially place.
Why should I pick up the Wisconsin State Journal – or the Taipei Times – when I can read Nate Silver, Ezra Klein, Bill Simmons, and the myriad other links served up by Twitter? I, and everyone else interested in news, politics, or sports, can read the best with less effort – and cost – than it ever took to read the merely average just a few short years ago.
While there is still a lot of work to be done on discovery (I mostly use Twitter, but admit the learning curve is steep), I already find the idea of being constrained to any one channel for reading to be laughably old-fashioned. And yet, that’s exactly what an app is: a single channel for one publisher’s content. Contrast this to the web, where any given piece is available instantly by simply clicking a link.
There is no question that apps are here to stay, and are a superior interaction model for some uses. But the web is like water: it fills in all the gaps between things like gaming and social with exactly what any one particular user wants. And while we all might have a use for Facebook – simply because everyone is there – we all have different things that interest us when it comes to reading.
That’s why very few of us devote all of our reading time to a single general interest newspaper these days, and that’s why we at WordPress.com have no intention of pushing anyone to any one particular platform or app. Instead our focus is on enabling and empowering individuals to create new content that is at home in the mobile browser, the WordPress.com app, Facebook or Twitter webviews, or any other channel that makes sense for the reader. Let the water flow to exactly where it’s needed! That’s the power of the web, and now that a computer is with us in so many more places, we need that flexibility more than ever.
