I apologize for the late delivery of this podcast!
In this week’s episode we discuss why Apple is so fascinating, why the Mac lost to Windows, debate whether or not Google should have open-sourced Android, and discussed the implications of Apple’s new market – your entire life
Also, please note that there will no episode later this week due to Chinese New Year.
The strange thing about death is that most of us cope by talking about ourselves. So it was on Twitter last night as word spread of the passing of New York Times media columnist David Carr; a nearly unending stream of expressions of grief mixed with personal anecdotes of a figure so clearly beloved.
I thought, though, the most poignant words came not from Carr’s journalistic colleagues, but rather from one of those to whom he, and all journalists, ultimately answer: a reader. From the comments on his obituary:
It’s not just that I loved him. I trusted him.
Over the last decade, as journalism has been going through a wrenching change brought on by its intersection with technology, Carr has been a touchpoint for people on both sides. To journalists, he was one of them; to techies, he at least seemed willing to listen, and maybe even adjust, and hopefully bring his profession along with him. Everyone trusted him.
Carr, though, was not always so trustworthy; if you have not, you must set aside time this weekend to read Me and My Girls, an adaptation from Carr’s book, “The Night of the Gun.” The book is the product of Carr applying his considerable journalistic skills to a surprising subject: himself, and his descent into drug addiction. The story is gripping, the narrative surpassed only by the lessons to be learned:
When memory is called to answer, it often answers back with deception. How is it that almost every warm bar stool contains a hero, a star of his own epic, who is the sum of his amazing stories?
If I said I was a fat thug who beat up women and sold bad coke, would you like my story? What if instead I wrote that I was a recovered addict who obtained sole custody of my twin girls, got us off welfare and raised them by myself, even though I had a little touch of cancer? Now we’re talking. Both are equally true, but as a member of a self-interpreting species, one that fights to keep disharmony at a remove, I’m inclined to mention my tenderhearted attentions as a single parent before I get around to the fact that I hit their mother when we were together. We tell ourselves that we lie to protect others, but the self usually comes out looking damn good in the process.
That, right there, is the root of his readers’ trust: Carr had doubt, a result of his deep self-awareness and the intimate knowledge of his own failings, and was thus far closer to the truth, whatever that might be, than most of us. It’s so easy to be certain, to think you know the answers. It’s comforting, even as it blocks the pursuit of knowledge. Uncertainty and questions, though, are uncomfortable and humbling, yet freeing.
Carr long ago lost any illusion that he knew it all. He wrote of his time in treatment:
Eden House was a long-term therapeutic community, the kind of place that brimmed with slogans. This was the main one: “The answer to life is learning to live.”
This is the point where the knowing author laughs along with his readers about his time among the aphorisms, how he was once so gullible and needy that he drank deeply of such weak and fruity Kool-Aid. That’s some other story. Slogans saved my life. All of them — the dumb ones, the imperatives, the shameless, witless ones.
I lustily chanted some of those slogans and lived by others. There is nothing romantic about being a crackhead and a drunk — low-bottom addiction is its own burlesque that needs no snarky annotation. Unless a person is willing to be terminally, frantically earnest, all hope is lost.
That slogan – “The answer to life is learning to live” – struck me as many journalists passed around one of Carr’s most famous pieces of advice:
Keep typing until it turns into writing
There it is: the Eden House slogan applied to journalism. If you don’t know how to live, just get busy learning how to live. If you don’t know what to write, just get busy typing. And if you don’t know the future of journalism, or anything really, just get busy asking questions with frantic earnestness.
There is perhaps no idea this blog has litigated against more fiercely than the idea of low-end disruption and the inevitable doom of the iPhone. It’s hard to imagine now, but when I started Stratechery in 2013, conventional wisdom held that Apple had peaked as Android devices became increasingly “good enough” and half the price to boot, all thanks to their modularity. The integrated iPhone would soon have to lower prices or start an inevitable decline – most likely both. In fact, though, this past quarter the iPhone not only grew tremendously on a unit basis, but the average selling price went up by an incredible $50.
To be perfectly honest, as much as I would like to claim I predicted this growth, my previous treatises – most notably, What Clayton Christensen Got Wrong – were more concerned with arguing that the iPhone would not collapse, an endgame that Christensen seems to still believe in. From an interview last fall with Business Insider:
In the early years of an industry’s life, almost always the dominant products are proprietary and interdependent in their architecture. In the smartphone world, the first one was Nokia — excruciatingly interdependent architecture — then RIM, which was an even more excruciatingly interdependent architecture, and then Apple. And Apple was kind of halfway. Inside of the device, it’s proprietary, but it initiated the modularity in that you could develop apps and stick them in. But then just like IBM identified modularity with the PC, Google gave us Android. And now I think the Android operating system as a platform, modularity, accounts for about 90% of the units, even while Apple makes all of the profit.
So if Apple keeps its strategy of very high prices, their share of that market will diminish. And so ultimately they’ll make a lot of profit on 100 units. And Samsung, if they win, they will be making all of the units in the industry but no profit. Either way you’re screwed, but that’s the theory behind why I said Apple won’t succeed, because in the end modularity always wins.
My objection to this line of argument has been that Christensen’s model only applies to business-to-business markets where the buyer is not the user; in consumer markets, on the other hand, markets are not monolithic, and some segment of the market cares about and is willing to pay for aspects of the user experience that can’t be measured but can only be delivered through an integrated experience.
The iPhone – and all of modern Apple’s products1 – is far more modular than it appears. It’s critical to understand where Apple has integrated, and why
Apple is creating an entirely new class of services that mix integration and modularization
The market in which the iPhone is competing is unimaginably large – far larger, in fact, than the smartphone market
I’ll explore each of these in turn, and explain why Apple is extremely well-placed to not just preserve its position, but to in fact continue its growth.
The iPhone is a Mix of Integration and Modularity
I am always confused when discussions about integration and modularity are reduced to questions about who makes the operating system. After all, the idea of integration and modularity have traditionally been concerned with industrial production and supply chains. Henry Ford, for example, in order to meet demand for his Model T, vertically integrated to the point where the company owned rubber plantations in Brazil to provide the raw material for tires; General Motors in part upstaged Ford through a more modular approach that allowed for more customization and differing levels of quality.
From this perspective – the hardware perspective – the iPhone is quite modular. Apple has 785 different suppliers, and while not all of them contribute to the iPhone, the vast majority do, making everything from screws to memory to camera lens assemblies. In fact, while I don’t know how many suppliers are in the Samsung supply chain, I’d wager it’s fewer than the iPhone’s, simply because Samsung itself is a component manufacturer. In other words, from a pure hardware perspective, it is Samsung that is more integrated than Apple.
The glaring exception, of course, is the A-series of Systems-on-Chip first introduced with the iPad back in 2010. In retrospect, though, this is the exception that proves the rule: it is in the design of the processor that Apple can best take advantage of the fact they make the software that runs on that chip, improving performance, battery life, and enabling key technologies like Touch ID. These are factors that are directly experienced by the customer (and, in the case of Touch ID, quite literally touched); that is where Apple integrates.
On the software side, Christensen is exactly right that the iPhone is modular by virtue of the App Store. Apps are the components of the iPhone software experience (and sadly for developers, similarly commoditized); even there, though, Apple controls as many of the customer experience points as possible, both through the App Store and App Review.2 It’s a similar arrangement to the iTunes Store (albeit without the review): effectively unlimited selection in an Apple-controlled wrapper.
The result is that the iPhone stack looks something like this:
Apple products have many modular components wrapped inside an integrated experience
Hundreds of components, millions of apps, and tens of millions of songs and videos, all wrapped in an Apple-controlled experience.
Redefining Services
Absent in my drawing of the iPhone stack was iCloud, a surprising omission given that Tim Cook has started referring to Apple’s ability to integrate not just hardware and software, but services as well.
In fact, I think that iCloud is the least interesting – and least important – aspect of Apple’s services offering, and I think the company agrees. Notice how much of iCloud’s functionality is becoming less differentiated, not more: iCloud Core Data, which sought to integrate iCloud into Apple’s data API, has been abandoned in favor of CloudKit, a rather generic offering similar to what a developer might get from AWS or Microsoft Azure. Similarly, iCloud Drive isn’t really any different from Dropbox – the per-application integration is gone.
Moreover, you don’t really need to use iCloud to get a full iPhone experience; you can manage your email, contacts, and calendar with Google or Microsoft, and most major apps like Facebook or Twitter are simply interfaces for their company’s cloud application. True, iCloud can do things like “Find my iPhone”, but iCloud is by no means a reason to be particularly optimistic about the iPhone’s long-run prognosis.
The problem is this narrow definition of services, something I first tackled in Xiaomi’s Ambition:
There’s come to be a bit of a cliché when it comes to writing about Xiaomi…They sell smartphones at cost, or close to it, and will make money through services. The trouble with a lot of this commentary surrounding Xiaomi1 comes in determining exactly what those “services” are. The easy assumption are traditional Internet services like those offered by Google, including an app store, online portals, so on and so forth. That, though, hardly validates a $45 billion valuation…
Instead, the way to understand Xiaomi and why exactly they are so valuable is to more deeply understand what Lei Jun means by “services”, and, in the end, why Xiaomi actually is a lot like Apple after all.
In that piece I concluded that Xiaomi was seeking to create an entire ecosystem around the home; true, the smartphone margins may be thin, but by integrating everything from air purifiers to wearables to TVs into MiUI, the Xiaomi smartphone layer, Xiaomi would both increase stickiness for their smartphones and make a lot of money selling to an entire generation entering both the middle class economically and their own homes physically.
Apple, though, is making the exact same play, but with an even broader ambition: they want the iPhone to be an essential part of not just your home but nearly every aspect of your life, and for that the company is building five foundational services:
HomeKit is Apple’s solution to the Internet of Things, and given both the disposable income and strong preferences of Apple customers, I expect Apple to get more traction here than just about anyone else (Xiaomi is an exception, largely because they are building – or funding companies to build – everything themselves). Everything in your house, controlled by your iPhone
CarPlay is self-explanatory: Americans especially spend a lot of time commuting, and Apple is attempting to make your iPhone the center of your experience in the car
Apple Pay is for the world at large; most of our interactions outside of the home are predicated on money changing hands, and Apple Pay is seeking to be the default mechanism. I’m bullish on its chances
Siri is for information and everything in the cloud: through your iPhone you can find out the answer to anything, just by asking
Finally, HealthKit is perhaps the most profound, because it is about interacting with and tracking your own body. A service doesn’t get much more sticky than that
These five services extend the iPhone’s importance to your daily life in nearly every dimension:
Apple’s services are extending the iPhone’s impact to every part of our lives
Note, though, that each of these services follows a similar model to the one Apple uses for the iPhone itself: Apple isn’t creating the furniture for HomeKit, the cars for CarPlay, the banks or retailers for Apple Pay, or information services for Siri. Instead they are leaving that up to the market in a modular fashion; the only integration is the actual interaction between the Apple layer and your iPhone.
To be sure, Apple’s success in each of these areas is by no means assured, particularly Siri where Apple is competing with Google. The iPhone, though, is Apple’s trump card, as Cook explained at yesterday’s Goldman Sachs Technology and Internet Conference:
We’ve taken iOS and we’ve extended it into your car, your home, into your health. All of these are really critical parts of your life and none of us want to have different platforms in different parts of our lives. We want one seamless kind of life. I think that’s huge for our future. It’s not every day you can plant that many foundational technologies.
Apple’s New Market
Christensen has previously explained that he got the iPhone wrong because it was disruptive to laptops, not cell phones. This, though, doesn’t particularly make sense given that the worldwide smartphone market vastly dwarfs laptops, and that while PCs aren’t growing, they still very much exist. Instead, as I argued in Obsoletive, the iPhone made the old idea of a cellphone obsolete: it was just another app on a computer that fit in your pocket.
The implications of this are even more profound than the fact nearly every person on planet earth will soon have a smartphone. Recall how Steve Jobs, after describing how a human on a bicycle is more efficient than even a condor, characterized computers:3
We humans are tool builders and we can fashion tools that amplify these abilities that we have to spectacular magnitudes. And so for me a computer has always been a bicycle for the mind.
That bicycle is now with us every where we go; what Apple is building are new paths.
In that respect, suppose Christensen is right: maybe in the long run everything Apple does will be modularized. However, if modularization wins in a mature market, that means – as Christensen says – that integration wins in a new one. And a new market is exactly where the iPhone is headed: Apple is on the verge of leaving the narrowly-defined smartphone market behind entirely, instead making a play to be involved in every aspect of its consumers’ lives. And, if the importance of an integrated experience matter more with your phone than your PC, because you use it more, how much more important is an integrated experience that touches every detail of your life?
By “modern” Apple I mean Apple since Steve Jobs’ return ↩
As I’ve noted several times, I’m also in the camp that believes Steve Jobs did not want an App Store, and this point explains why: software is experienced by the consumer, ergo, Apple would make all the software ↩
I’ve discussed Jobs’ bicycle of the mind analogy previously here↩
This is the story of Stratechery, presented with much sheepishness on my part. How I thought about the market, my business model, and more. I apologize that this is a little long and perhaps a bit choppy. It’s hard to talk about me!
I am saturated in digital life and I want to return to the actual world again. I’m a human being before I am a writer; and a writer before I am a blogger, and although it’s been a joy and a privilege to have helped pioneer a genuinely new form of writing, I yearn for other, older forms. I want to read again, slowly, carefully. I want to absorb a difficult book and walk around in my own thoughts with it for a while. I want to have an idea and let it slowly take shape, rather than be instantly blogged. I want to write long essays that can answer more deeply and subtly the many questions that the Dish years have presented to me. I want to write a book.
In the hours and days after that post, it became a meme to say that “blogging is dead” (BuzzFeed’s Ben Smith has led the charge for a while now). You’ll be unsurprised to know that I disagree, but it seems Sullivan anyways wouldn’t understand why this rebuttal has taken four full days to appear. After all, according to Sullivan’s definition of blogging — “daily, hourly, always-on-deadline stress” consisting of “idea[s]…instantly blogged” — my having first enjoyed a weekend with my family while I turned over this debate in my head, and only then written what I hope is a thoughtful reply, means I’m doing it wrong.
Unbundling the Blog
The truth, though, is that blogging has evolved. It is absolutely true that the old Sullivan-style — tens of posts a day, mostly excerpts and links, with regular essays in immediate response to ongoing news — is mostly over. No one said it better than blogger extraordinaire Jason Kottke:
Sometime in the past few years, the blog died. In 2014, people will finally notice. Sure, blogs still exist, many of them are excellent, and they will go on existing and being excellent for many years to come. But the function of the blog, the nebulous informational task we all agreed the blog was fulfilling for the past decade, is increasingly being handled by a growing number of disparate media forms that are blog-like but also decidedly not blogs.
Instead of blogging, people are posting to Tumblr, tweeting, pinning things to their board, posting to Reddit, Snapchatting, updating Facebook statuses, Instagramming, and publishing on Medium…
In many respects, this map — indeed, the entire history of social media, particularly the public-facing services — is a story of unbundling the old-school blog. Twitter has replaced link-posts and comments, Instagram has replaced pictures, and Facebook has replaced albums and blogrolls; now Medium is seeking to replace the essay. None of this is a bad thing: literally billions more people now have a much simpler way to express themselves online thanks to the ease-of-use that is characteristic of any service that seeks to focus on one particular aspect of communication, a big contrast to a blog’s ability to do anything and everything relatively poorly. It’s fair to ask just what a blog is good for anyway.
Defining “Blog”
A big problem with this entire discussion is that there really isn’t a widely agreed-upon definition of what a blog is, thanks in part to the rise of sites like TechCrunch that ran on WordPress and presented posts in reverse-chronological order and so, at least in the beginning, were called “blogs”; add to that the thinly-disguised PR-channels known as “company blogs” and it’s easy to get confused.
And so, to be clear, when I speak of the “blog” I am referring to a regularly-updated site that is owned-and-operated by an individual (there is, of course, the “group blog,” but it too has a clearly-defined set of authors). And there, in that definition, is the reason why, despite the great unbundling, the blog has not and will not die: it is the only communications tool, in contrast to every other social service, that is owned by the author; to say someone follows a blog is to say someone follows a person (This applies both for amateur and professional bloggers; most of the rest of this post is concerned with the latter).
I think we’re getting better at serving a huge audience even as we’re getting worse at serving a loyal one.
That, though, is good for Vox, given their dependence on advertising. As I’ve noted previously while writing about newspapers, your business model is your destiny, and an advertising business model demands huge amounts of inventory served to a large number of readers targeted with a massive amount of data.3 Note carefully those words: “huge,” “large”, and “massive” are antithetical to my definition of a blog – something defined by a single individual.
It turns out, though, that there are more business models than simply advertising, as Sullivan himself sought to show. Sullivan was, for the last two years, supported by reader subscriptions to the tune of nearly one million dollars a year, and while many were skeptical of Sullivan’s efforts when he started, his ability to raise money shouldn’t have been a surprise: his is a singular voice — to put it in economic terms, Sullivan’s writing had a low elasticity of substitution — so people were happy to pay for something they couldn’t get anywhere else.4 Right there was the exact loyalty that Klein fears has been lost.
Scale Versus Reach
Moreover, Klein is wrong about blogging and scale:
Sullivan was the closest we had to someone trying to run a blog with real scale. He was trying to make his blog — and its sizable audience — into a business. But blogging, for better or worse, is proving resistant to scale.
But Sullivan did have a viable business, and it scaled wonderfully: it cost him the same amount of both time and money to serve 1,000 subscribers as it would have to serve 100,000, or 1 million,5 and he didn’t need to change a thing about himself or his content to do it. No, it’s not scale that is the problem, but rather reach.
I am, of course, acutely aware that there is a tradeoff when it comes to the subscription business model: by making something scarce, and worth paying for, you are by definition limiting your number of readers.6 Stratechery, though, serves a niche, and niches are best served by making more from customers who really care than from milking pennies from everyone.
Here’s the thing, though: the upside of my business model is that Stratechery has all of the things that Klein claims are being lost:
An assumption my readers (especially my subscribers) read everything I write7
A single voice
Loyalty
It’s this last part that is the most rewarding: Vox, in its desire for reach, asks nothing of its readers beyond tolerance for posts they don’t care about, which means no one should be surprised the user experience of the site is increasingly annoying. I, on the other hand, ask for money and am heavily motivated to deliver value in return – the relationship is reciprocal. That means not wasting my readers’ time; it means focusing on quality over quantity; indeed, it means waiting four days to write something thoughtful (hopefully!) instead of simply trying to be first.8
That Would Be Fine For Ezra
Whenever I write about Stratechery’s business model I constantly hear objections along the lines of “That’s fine for Ben,” the insinuation being that what I do is not replicable. And, to be sure, I am by no means arguing that you can make money from a blog just because you want to. At the risk of humblebragging, you need to offer something unique, and at least 2,000 people believe I do.9
Klein, though, is unique, and he has 732k Twitter followers and a history of success to show for it. That, more than anything, is why I found his piece in particular so frustrating to read: blogs are not dead, but Klein’s is, and while I don’t begrudge him his choice, I question the degree to which he knows he made one.10
Moreover, there are reasons to be optimistic beyond Sullivan’s success, or my own:
While WordPress has long been an effective free option for managing the content-side of blogging, only recently are there useful tools for managing the business-side. First and foremost amongst these is Stripe which, for the first time makes managing subscription-payments simple and straight-forward. However, there are still holes, particularly when it comes to actually managing membership lists and communities
Klein is right that social media drives a huge amount of traffic; the key for the independent blogger, then, is not to treat social media as the primary source of traffic, but as a marketing channel for their free content.11 In my case, Twitter is to my marketing needs what WordPress is to my content-management needs: essential, incredibly powerful, and completely free
Perhaps most importantly, I believe that more and more consumers are coming to grips with the reality of online media: when everything is free, you too often end up getting exactly what you paid for. If you consider the time wasted reading clickbait, a few bucks a month for content you trust isn’t such a bad deal
Forgive me if this article read a bit too much like an advertisement for Stratechery; the honest truth is my fervent belief in the individual blog not only as a product but also as a business is what led to my founding this site, not the other way around. And, after this past weekend’s “blogging-is-dead” overdose, I almost feel compelled to note that my conclusion — and experience — is the exact opposite of Klein’s and all the others’: I believe that Sullivan’s The Daily Dish will in the long run be remembered not as the last of a dying breed but as the pioneer of a new, sustainable journalism that strikes an essential balance to the corporate-backed advertising-based “scale” businesses that Klein (and the afore-linked Smith) is pursuing.12
This post is about blogging, not Andrew Sullivan’s politics. Whatever your opinion on the latter, there is no denying his influence on the genre ↩
This is the most-current version, last updated for this Daily Update (members-only); SnapChat – and all the chat services – are expanding into the broadcast space, and I need to add Medium ↩
This last point is why Vox’s – and all the other new media sites’ – valuation is relatively modest ↩
In fact, I would argue Sullivan earned far less from his blog than he could have; his paywall was quite leaky (you needed to read a relatively high number of full-length articles before you were cut off, and even then only for the rest of the month) and his rate ($19/year) quite low. ↩
Hosting costs are an exception of course, but the marginal cost of one more subscriber is infinitesimal ↩
In the case of Stratechery, surely my audience would be significantly larger were my Daily Updates broken up into their 8~10 component pieces and posted for free. More importantly, though, they would not exist because I would not reach nearly a large enough audience to pay for that attention through advertising, which means Stratechery wouldn’t be my job. ↩
The Daily Update has a nearly 80% open rate, over triple the industry average↩
There is a third business model, as well, best personified by John Gruber and Daring Fireball. This entails being dominant within a niche such that you attract sponsors seeking to reach a highly targeted market. It works very well, both for Gruber and for sponsors, although it takes a much larger audience than a subscription-based model ↩
After passing 1,000 late last year I passed 2,000 late last month. I didn’t plan on another numbers update, but my passion for this argument outweighs my Midwestern reticence ↩
For what it’s worth, I bet Klein probably wouldn’t change a thing; reach is useful if you’re seeking to change the course of national politics. Personal ambition, though, isn’t grounds for saying blogs aren’t a viable business model ↩
I post at least one free item a week and four members-only Daily Updates ↩
As I noted, I’m optimistic about Vox (and especially BuzzFeed), poop posts notwithstanding. Sustainable, broad-based publications are important; in fact, that’s why I blog about them regularly (members-only) ↩
We discuss Apple’s recent results, why analysts get Apple wrong, the fraught nature of fans, epistemic closure, and whether the iPhone can continue to grow.
John Gruber is, as only he can, relishing the claim chowder – his collected bits of analyst wisdom sure, again and again, that Apple is doomed.
Apple, of course, is not doomed. In fact, the company is the very opposite of doomed, having just posted the best quarter of any company, ever.1 The analysts Gruber mocks were not just wrong (and, as everyone knows, they are only a small part of a much larger sample), they were hilariously wrong, and cost their clients millions of dollars.
And yet, the perception that Apple is somehow hanging on by the skin of their teeth persists. I was speaking to someone about Apple’s particularly excellent China results this afternoon, and was struck at how their questions were so focused on threats to Apple – “How will Apple respond to Xiaomi” for example. This is in stark contrast to the way most think about a company like Google, where their dominance in whatever field they choose to enter is assumed, just as Microsoft’s was a decade ago. Apple, though, is always a step away from catastrophe.
It’s difficult to overstate just how absurd this is, but here’s my best attempt: last quarter Apple’s revenue was downright decimated by the strengthening U.S. dollar; currency fluctuations reduced Apple’s revenue by 5% – a cool $3.73 billion dollars. That, though, is more than Google made in profit last quarter ($2.83 billion).2Apple lost more money to currency fluctuations than Google makes in a quarter. And yet it’s Google that is feared, and Apple that is feared for.
I’ve previously, in one of the first ever posts on Stratechery, tried to figure out why it is that people keep getting Apple so wrong; I chalked it up to an over-reliance on modeling and magical manager syndrome. And, while I think that is still true, it’s hard to escape the conclusion that much of the reporting and analysis about Apple specifically and tech broadly is governed by bad assumption on top of bad assumption on top of bad assumption:
Bad Assumption 1: Markets are monolithic
If you look at a market monolithically, simple math dictates that the average will be most heavily influenced by the majority. And, income distributions being what they are, the majority of customers in any market will have less money, and likely be inclined to prioritize price. Ergo, monolithic market analysis necessarily concludes that customers prioritize price.
Markets, though, are not monolithic. They are wildly disparate, able to be endlessly segmented not just by income, but by a whole host of demographic and psychographic factors. In every market there is a segment of people who have the means to buy nice things, and there is a segment that values a superior experience. These segments quite often overlap, to Apple’s benefit.
Bad Assumption 2: Consumers only care about speeds, feeds, and price
The old hoary chestnut that “Apple only wins because its advertising tricks people into paying too much” was raised in my Twitter feed last night, and while the holders of such an opinion are implicitly saying others are stupid, my take runs in the opposite direction: it’s not that people are irrational, it’s that human rationality is about more than what can be reduced to a number. Delight is a real thing, as is annoyance; not feeling stupid is worth so much more than theoretical capability. Knowing there is someone you can ask for help is just as important as never needing help in the first place.
Apple spends an inordinate amount of time and resources on exactly these aspects of their products. Everything is considered, from the purchase to the unboxing to the way a webpage scrolls. Things are locked down and sandboxed, to the consternation of many geeks, but to the relief of someone who has long been conditioned to never install anything for fear of bad actors. Stores – with free support – are just a few miles away (at least in the US), a comfort blanket that you ideally never need. All of this is valuable, even though much of it is priceless, only glimpsed in an average selling price nearly triple the industry average.
Bad Assumption 3: Apple’s talk about “making the best products” is for show
Apple executives have again and again stated some variation of the line Tim Cook delivered during his prepared remarks on yesterday’s earnings call:
Apple’s mission is to make the greatest products on earth and enrich the lives of others
Surely it can’t be so simple! Surely to believe such tripe is the ultimate in fangirl-hood. And, in fact, I hesitate to write about stuff like this, for fear of the fanboy angle. This blog prides itself on calling things as I see them, not as I wish they were. At a more fundamental level, I’m much more concerned with the underlying strategies and trends that govern companies, and the incentives that ultimately decide how effective those strategies are.
It’s incentives, though, that make Cook’s line so believable. If you believe, as I do, that there is a segment of the market that is not strictly governed by the lowest price, and if you further believe that customers value products that deliver more value than what can be reduced to a number, then you believe there is an opportunity to create best-in-breed experiences for a handsome price. In this view, Apple’s focus on “making the best products” is perfectly aligned with their market opportunity.
To put it another way, is Apple concerned with making the best product, or with making the most money? The answer is yes.
And so they have.
My analysis of the earnings is here (members-only) ↩
My Google Youtube rep contacted me the other day. They were nice and took time to explain everything clearly to me, but the message was firm: I have to decide. I need to sign on to the new Youtube music services agreement or I will have my Youtube channel blocked.
This new music service agreement covers my Content ID account and it includes mandatory participation in Youtube’s new subscription streaming service, called Music Key [a Spotify-like service that costs $9.99/month], along with all that participation entails.
Keating primarily focuses on the fact that YouTube is basically giving her no choice in the matter:
The catalog commitment is the biggest issue for me. All these years I’ve yet to participate fully in any streaming service although I’ve chosen to give a handful of recordings to a few of them. If anyone wants more and they balk at paying for it, they can always stream all my music for free on Bandcamp or Soundcloud or they can torrent it (I uploaded my music to Pirate Bay myself many years ago). I’ve heard all the arguments about why artists should make all their music available for streaming in every possible service. I also know the ecosystem of music delivery made a shift away from downloading last year. Streaming is no longer advertising for something else, it is the end product. It’s convenient. Convenience is king. Yup, got all that, thanks.
This is the important part: it is my decision to make.
Certainly, YouTube owns their service, and they get to choose the terms they offer. And it’s easy to look at Keating – who uploaded her entire catalog to The Pirate Bay – and dismiss her as some sort of radical. I get the impression from Keating’s article that that is exactly how she is perceived:
A year ago my Youtube rep let me know there was a new music service coming and she sent along a new agreement. I read it and raised my concerns and asked if I could return the contract with those particular terms struck out. Alas no but the product folks seemed genuinely curious about my concerns and I had a phone meeting with them. The meeting was similar to one I had with DA Wallach of Spotify a couple years ago. Similar in that I got the sense that no matter how I explained my hands-on fan-supported anti-corporate niche thing, I was an alien to them. I don’t think they understood me at all…
In fact, while Keating may be a radical, I think she’s also entirely rational: I’m increasingly of the opinion that all-you-can-eat subscription services like YouTube Music Key or Spotify are a downright bad idea for niche artists.
The Problem with Niche Artists and Subscription Services
Stepping back, in one of my favorite episodes of Exponent, James Allworth and I coined the idea of The Internet Rainforest (although, now that I think about it, we mostly refer to it as the Internet jungle). The idea is that the economics of the Internet work for two types of businesses:
Massive businesses that can take advantage of the Internet’s scale to reach a huge number of people very cheaply and efficiently
Niche businesses that can take advantage of the super low costs involved in running an Internet business to reach a very narrow niche of people all over the world very cheaply and efficiently
Think of any potential audience as following a power curve:
The two business models on the Internet
With this audience there are two ways to maximize revenue:
You can try to make a little bit of money from a lot of people – this entails getting a little bit of money from everyone on the curve
You can try to make a lot of money from a few people – this entails maximizing the gain from the people on the left side of the curve
Think about a company like Facebook: true, there may be some Facebook-aholics who live in the service and would love if Facebook would just go crazy on the features, but serving those customers would endanger the right side of the curve – the people who are more take-it-or-leave-it. Ultimately, because Facebook monetizes through advertising, more eyeballs are more important than more intensive ones, so their product decisions are made with an eye towards appealing to as many people as possible. Of course Facebook doesn’t stop here – you can think of targeting as a way for them to make more money from some consumers than from others. Still, the goal is more users, not fewer.
A site like mine, on the other hand, or any number of niche-focused sites and services, is much more concerned with people on the left-side of the curve. We don’t want pennies from millions, but tens or hundreds of dollars from thousands. This, though, means that our motivations when it comes to our product are far different: if we appeal to everyone, we are necessarily loved by no one.
True Differentiation
Tim Wu has a piece in The New Yorker about the rise of small businesses, with a particular focus on craft brewers:
Consider the story of craft beer. Large-scale breweries destroyed their smaller rivals in the twentieth century because they were able mass produce the stuff for cheaper (reaching wholesale prices of about fifty cents a beer or less) and because their fat margins allowed them to pay for things such as television advertising…
But the small breweries came back. Their beers were not better advertised and certainly not better priced. Rather, the crafts went after an enormous blind spot for the big breweries—namely, flavor. I don’t entirely mean to be snide; more precisely, craft beer succeeded by opting not to compete directly, instead pursuing what can be called a “true differentiation” strategy. That means they established a product that, in the mind of the consumer, is markedly and undeniably different…
Here’s the thing: a lot of people dislike many of these craft beers, or at least some of the more unique and radical brews. But that’s a good thing! You can only succeed against a low-cost competitor by being different, and to be different is to be polarizing. More than that, though, you need a different business model: craft breweries make money by charging more; big breweries make money by reducing costs.1
The difference in business models is far more stark on the web; at scale, advertising is the obvious solution. For niches, though, I strongly believe that direct payment is superior. It’s simply easier to get a lot of money from your best fans than it is to get a little bit of money from many. This, though, is the problem with all-you-can-eat subscription services: they only afford the chance to make a little bit of money from any one customer, even as they increase the friction over free. And, I agree with Keating that the subscription services, including YouTube, don’t understand this:
The Youtube music service was introduced to me as a win win and they don’t understand why I don’t see it that way. “We are trying to create a new revenue stream on top of the platform that exists today.” A lot of people in the music industry talk about Google as evil. I don’t think they are evil. I think they, like other tech companies, are just idealistic in a way that works best for them. I think this because I used to be one of them. The people who work at Google, Facebook, etc can’t imagine how everything they make is not, like, totally awesome. If it’s not awesome for you it’s because you just don’t understand it yet and you’ll come around.
I think it’s more that nearly everyone at tech – and I’ve witnessed this first hand again and again – is deeply conditioned to think at scale. It is the first question out of anyone’s mouth when it comes to a new service or product – “Can it scale?” Niches, though, don’t scale; they go deep. More importantly, they go deep in a way that wasn’t possible previously. Note again this line:
We are trying to create a new revenue stream on top of the platform that exists today.
I suspect this was in reference to the monetization options already on YouTube, but I have a much more profound objection to this idea: the thing about craft brewers is that they didn’t even have the option to be different until 1978 when President Carter signed Senate Amendment 3534 which deregulated home brewing. Similarly, the vast majority of niches – particularly for rock-and-roll cello players – were economically unviable before the Internet drastically reduced the cost of both production and distribution. In other words, there is nothing to “build on top of.” Spotify and YouTube Music Key and other all-you-can-eat services are ultimately suited for music that is broadly appealing – the same sort of music that has ruled the radio for decades. For anything truly different, though, anything with a limited but intensely interested audience, they are nothing but a bad idea – a way to both limit your audience and limit the amount of money you can make from your best fans.
The Proof is in the Revenue
In fact, Keating is the best example of this: she revealed her revenue figures last year. From The Guardian:
Keating’s biggest source of income last year was Apple’s iTunes Store, where sales of 32,170 single tracks and 3,862 albums netted her just over $38,195. Meanwhile, 185 tracks and 2,899 albums sold through her profile on direct-to-fan site Bandcamp earned a further $25,575, while a mixture of physical and MP3 sales on Amazon earned her a further $11,571.
403,035 Spotify streams earned Keating $1,764, while more than 1.9m views of videos on YouTube – mostly those uploaded by other people featuring her music – earned her $1,248. US personal radio service Pandora generated $3,258 of royalties – but from an undisclosed number of streams.
To be sure, downloads are dying broadly, but that’s my entire point: the mistake YouTube and Spotify and nearly everyone else makes when considering media of all types is to put everyone in the same boat. In fact, it’s the middle that is doomed but things are looking up for the truly differentiated. There are more ways to reach more fans who really care and who will relish the opportunity to pay.2
So there’s your answer Zoë: tell YouTube to take a hike (but hey, keep it for marketing).
As Joe Cieplinski noted on Twitter, “Your update today made me think of indie app devs. Most make craft beer and try to sell it at Bud Light prices.” ↩
Concerts are one way to make money, but they’re really expensive especially for niche artists (and they’re obviously not an option for non-musicians). I don’t believe they are a sustainable answer ↩
We briefly follow-up on last week’s copyright discussion, discuss Ben’s article on what the technology adoption curve gets wrong about Apple and Xiaomi, and then react to Microsoft’s Windows 10 (and Project HoloLens) presentation
Links
Stratechery Forum Discussion about Episode 30: Flabbergasted – Stratechery Forums (members-only)
Ben Thompson: The End of Trickle-Down Technology – Stratechery
Ben Thompson: Part 1 of an Interview with Xiaomi VP of International Hugo Barra on India and Xiaomi’s Strategy and Target Customer – Stratechery (members-only)
Ben Thompson: Microsoft’s Windows 10 Event (and Project HoloLens) – Stratechery (members-only)
Ben Thompson: It’s Time to Split Up Microsoft – Stratechery
Ben Thompson: Face in not the Future – Stratechery
Ben Thompson: Christmas Gifts for Microsoft, Intel, Amazon – Stratechery
Last Sunday I joined Leo Laporte, Serenity Caldwell, and Iain Thomson for a discussion about requiring backdoors, digital arms race, Xiaomi’s opportunity, and more.
I joined John Gruber for (another) marathon episode of The Talk Show, where we covered Apple’s hiring practices, Scott Forstall, Instagram, Box’s IPO, the Amazon Echo and Phone, and Microsoft’s Windows 10 event.
As an aside, I noted in this show that Apple, at least in my experience, hires more broadly than many tech companies which I characterized as being very Stanford focused. I hope this is obvious, but one, I was using Stanford as a stand-in for a general focus on academic qualifications, and two, Stanford is awesome and lots of awesome people have gone there. My only point is that a diversity of backgrounds and experiences is a good thing. I think that was clear, but I apologize if it came across at all differently.
One normally wouldn’t expect farmer psychology and technology to have much in common, but drawing unexpected connections is the mark of truly innovative thinkers, and Geoffrey A. Moore’s Crossing the Chasm is a truly innovative book.
Building on the work of three Iowa State professors studying the spread of hybrid seed corn, Moore developed the technology adoption cycle, which breaks the market for new technologies into five parts:
Technology Enthusiasts love tech first and foremost, and are always looking to be on the cutting edge; they are the first to try a new product
Visionaries love new products as well, but they also have an eye on how those new products or technologies can be applied. They are the most price-insensitive part of the market
Pragmatists are a much larger segment of the market; they are open to new products, but they need evidence they will work and be worth the trouble, and they are much more price conscious
Conservatives are much more hesitant to accept change; they are inherently suspicious of any new technology and often only adopt new products when doing so is the only way to keep up. Because they don’t highly value technology, they aren’t willing to pay a lot
Skeptics are not just hesitant but actively hostile to technology
Moore was primarily concerned with “crossing the chasm” from the early market – enthusiasts and visionaries – to the mainstream market – pragmatists and conservatives, and if there is one product that clearly crossed the chasm, it is the smartphone. There are an estimated two billion smartphones in use around the world, and in developed countries penetration is reaching the 80% mark – only the skeptics are left. Surely this is a mature market.
That, though, makes the fates of the three biggest smartphone companies – Apple, Xiaomi, and Samsung – particularly interesting:
Apple offers by far the most expensive phones on the market, but even though the early price-insensitive market has presumably been saturated, the iPhone is actually growing
Samsung phones are widely available at multiple price points, making them an easy choice for low information customers on the right side of the cycle, yet the company is struggling
Xiaomi has very aggressive prices, but their brand proposition is very much tuned to the left side of the cycle
All of this seems to fly in the face of Moore’s assumption that late-stage adoption would be driven by price and pragmatism (or, in the case of conservatives, necessity). Price and pragmatism might as well be Samsung’s motto, while Apple is super expensive and Xiaomi is avowedly geeky.1
I suspect the problem is that while Moore has updated “Crossing the Chasm” (the third edition came out last January), the book is still a product of 1991 when nearly all technology buyers were businesses located in developed countries. Smartphones don’t have either qualification: people buy smartphones, not businesses, and developing countries are just as much a market as developed ones.
Apple and the Conservatives
According to Moore, high prices are only sustainable on the left side of the adoption curve:
The first perspective to set on pricing is the customers’, and, as we noted in the section on discovering the chasm, that varies dramatically with their psychographics. Visionaries – the customers dominating the early market’s development – are relatively price-insensitive. Seeking a strategic leap forward, with an order-of-magnitude return on investment, they are convinced that any immediate costs are insignificant when compared with the end result. Indeed, they want to make sure there is, if anything, extra money in the price, because they know they are going to need special service, and they want their vendors to have the funding to provide it. There is even a kind of prestige in buying the high-priced alternative. All this is pure value-based pricing. Because of the high value placed on the end result, the product price has a high umbrella under which it can unfold.
Certainly Apple has captured the visionaries, but how is it that the iPhone continues to grow? After all, Moore argues that conservatives will behave the exact opposite:
At the other end of the market are the conservatives. They want low pricing. They have waited a long time before buying the product – long enough for complete institutionalization of the whole product, and long enough for prices to have dropped to only a small margin above cost. This is their reward for buying late. They don’t get competitive advantage, but they do keep their out-of-pocket costs way down. This is cost-based pricing, something that will eventually emerge in any mainstream market, once all the other margin-justifying elements have been exhausted.
In this Moore’s thinking is not unlike Clayton Christensen’s: low-end disruption theory is also focused on performance and price. In a new market – the visionary market – when no product is good enough, the integrated provider can sell superior performance with a margin to match, but over time, as the technology becomes “good enough,” lower-priced modular competitors will take over the market.
However, as I argued in Best, in consumer markets the user experience is just as important.
The primary flaw in this conclusion, as I detailed last year, is that the Christensen evaluation of “good enough” only considers technical capabilities. Christensen did later add the idea of emotional jobs-to-be-done – this covers things like luxury bags, for example, which confer status – but that doesn’t fully explain Apple in particular. Instead, my position is there is a third component of product capability: the user experience. Moreover, the user experience is unique in that, like emotional jobs-to-be-done, a product can never be “too good,” and, like technical jobs-to-be-done, it is always possible to improve – or to fall behind.
Moreover, if user experience matters generally, it matters the most to conservatives. Moore notes:
The truth is, conservatives often fear high tech a little bit. Therefore, they tend to invest only at the end of a technology life cycle, when products are extremely mature, market-share competition is driving low prices, and the products themselves can be treated as commodities. Often their real goal in buying high-tech products is simply not to get stung. Unfortunately, because they are engaging with the low-margin end of the market, where there is little motive for the seller to build a high-integrity relationship with the buyer, they often do get stung. This only reinforces their disillusion with high tech and resets the buying cycle at an even more cynical level.
If high-tech businesses are going to be successful over the long term, they must learn to break this vicious circle and establish a reasonable basis for conservatives to want to do business with them. They must understand that conservatives do not have high aspirations about their high-tech investments and hence will not support high price margins. Nonetheless, through sheer volume, they can offer great rewards to the companies that serve them appropriately.
I think Moore was spot-on on the psychology of conservatives, but completely underestimated their willingness to pay for a solution that allays their fear. These customers don’t want leftover technology that barely works. They want technology that works better. Specifically, Apple’s focus on the user experience ought to be even more attractive to conservatives than it is to visionaries, and this very sizable group is potentially more willing to pay for a solution that is easier to use.
If indeed Apple has broken through with conservatives, this has powerful implications for all kinds of companies: smartphones are the tip of the spear when it comes to the spread of technology into every part of society, and what Apple may be demonstrating is that there is real money to be made amongst late adopters if the user experience is demonstrably superior. To be sure, Apple’s powerful brand and reputation is hard to replicate,2 but the iPhone’s continued success offers hope that customers will pay for true differentiation, not trickle-down technology.
Xiaomi and the Visionaries
If Apple is doing surprisingly well on the right side of the adoption cycle, I think the best way to think about Xiaomi is that they are competing in a different market entirely. For much of China and especially India, price matters not because people don’t care, but simply because many don’t have very much money.
This is a critical distinction: in Moore’s telling, pragmatists and conservatives pay attention to price simply because they aren’t willing to pay a premium. They have the capability, but not the desire. This, though, does not describe the typical Xiaomi customer. From an interview I conducted with Xiaomi Vice President of International Hugo Barra (members only):
BT: Who is your target customer in China?
HB: Our target customer in China are the 18 to 30 year olds, reasonably well educated, reasonably geeky, and value-orientated [i.e. not rich] and who appreciate the high spec. They are the ones who become the ambassadors for the brand to other audiences…
BT: What about internationally?
HB: Largely the same thing. I think we what we’re learning in India in particular is that the IT-educated is extremely large. I think a lot of that is a result of India’s tradition of being the IT back office of the world. In India, even the Red Mi product line attracts the IT-educated customer who just doesn’t have the money to buy one of our high-end products. But we find ourselves having a conversation about features and specs with a customer who bought Red Mi 1S that in other markets I would only have with someone who is buying a high end product. We’ve never experienced a level of scrutiny at a spec and performance level on a Red Mi product that we have in India.
These customers are not conservative, or even pragmatists: they are enthusiasts and visionaries who simply don’t have very much money. The proper way to reach them, then, is not to sell them trickle-down technology: they will see right through that, and dismiss it out of hand. Rather, the solution to is develop new business models – indeed, in the case of Xiaomi, a new company – that is built from the ground-up to serve their specific needs.
This, too, is a powerful opportunity: there are far, far more potential customers in developing countries than there are in developed ones, but just because they don’t have much money does not mean they are technological laggards. Indeed, many of these customers are even more advanced when it comes to being mobile first because of the lack of a PC legacy, and they will embrace a brand that lets them live on the cutting edge.
To be sure, there is still innovation happening among rich consumers in the developed world – Uber is evidence of that! However, I suspect it is these two markets – conservatives in developed countries, and enthusiasts and visionaries in developing ones – that will provide some of the biggest opportunities over the next few years. The smartphone has opened the door: which companies will walk through it?
Xiaomi Vice-President of International Hugo Barra told me in an interview (members-only) that Xiaomi is “a geeky lifestyle brand ↩
