The Week in Daily Updates (Week 2)

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The main page content on Stratechery is free for all readers, but I also offer the Daily Update via email and RSS for $10 per month/$100 per year.1 This is a selection of items that were sent out in this week’s Daily Updates. To sign up, visit the Membership page

Was Google+ A Success?

(Posted on Monday, April 28)

Vic Gundotra, the former Microsoft executive who worked on Android and then Google+, left Google last week amid word that Google+ was being largely disbanded. From TechCrunch:

Today, Google’s Vic Gundotra announced that he would be leaving the company after eight years. The first obvious question is where this leaves Google+, Gundotra’s baby and primary project for the past several of those years.

What we’re hearing from multiple sources is that Google+ will no longer be considered a product, but a platform — essentially ending its competition with other social networks like Facebook and Twitter.

As I’ve written in the past, I always saw the social network aspects of Google+ as frosting on the cake; the true win was identifying and tracking Google users. John Battelle wrote just that:

Whether or not Google+ continues as a standalone product isn’t the question. Google likely never cared if Google+ “won” as a competitor to Facebook (though if it did, that would have been a nice bonus). All that mattered, in the end, was whether Plus became the connective tissue between all of Google’s formerly scattered services. And in a few short years, it’s fair to say it has.

Many, though, have argued that Google was in fact quite serious about Google+ being a viable social network, including this former intern:

Today, it can be hard to imagine that Google faced a deep existential threat to its business three years ago. The company’s financials were as strong as always, but there was a growing cacophony among bloggers and the wider media over the future of the company in the throes of an industry rapidly changing due to social, local and mobile. Google was still primarily a web-based company, the bulk of its revenues derived from advertising that had failed to deeply penetrate any of these three nascent verticals.

These concerns were obviously external as well as internal to Google. It was clear that Facebook, with its ever-expanding social graph, was developing an extraordinary dataset that could undermine the supremacy of Google’s key search product…

These fears manifested themselves in what would eventually be called Google+.

That final sentence is so powerful, and really says all you need to know about Google+. It was a product that existed because Google needed it to exist, not because there was a consumer need. How many products, particularly those from large corporations, are little more than the manifestation of corporate fear? It’s certainly a great description of Windows 8, for example, and is something to keep in mind when and if an iWatch is announced.

Samsung’s Earnings

(Posted on Tuesday, April 29)

Sasmung’s mobile division nubmers disappointed once again. From Bloomberg:

Samsung Electronics Co., the largest smartphone maker, posted the lowest sales at its mobile-phone business in five quarters as Chinese producers gain in emerging markets with cheaper, feature-packed devices.

Revenue at the mobile division, the company’s biggest business, fell to 32.4 trillion won ($31 billion) in the three months ended March, the lowest since the quarter ended Dec. 31, 2012, Samsung said today. The Suwon, South Korea-based company’s share of the global smartphone market fell for the first time in four years, according to Strategy Analytics. The shares fell.

As I wrote last week, Apple bears fail to appreciate there is a sustainable high end of the phone market, which Apple is increasingly dominating. Their prescription for what might befall Apple, though, isn’t wrong in its mechanics but rather its application: their predictions are exactly what is happening to Samsung.

Look at the non-iPhone smart market: by definition it is a commodity market where low price wins. There Samsung is the integrated incumbent, facing an onslaught of good enough modularized phones, primarily from China. This dynamic is very predictable in any commodity market; the only mistake the Apple Bears make is dismissing iOS and presuming everything is a commodity.

F8 High Level Overview

At a very high level, yesterday’s Facebook announcement were about turning the old Facebook platform completely on its head. Previously, Facebook’s primary goal was to pull content and apps into Facebook, with the idea that your timeline would be the center of your online experience. It was a strategy that made sense in the context in which Facebook existed, namely, the PC, itself a destination device.

As the world has gone mobile, though, Facebook has famously learned that one app to rule them all simply doesn’t work. Instead, complexity and interconnectedness needs to move under the surface, connecting individual apps (usually via the cloud) like a digital pando tree. So, instead of pulling attention into Facebook, yesterday’s announcements were about extending Facebook’s tendrils into all kinds of different apps in a mutually beneficial way. Facebook is going to app developers, instead of telling app developers to come to Facebook.

The full list of topics covered this week in the Daily Update include:

  • Fast Lanes and Net Neutrality
  • Was Google+ a Success?
  • Amazon Earnings Follow-up
  • Bitcoin and China
  • Samsung’s Earnings
  • International Plans for Xiaomi and Lenovo
  • Twitter’s Earnings
  • WWDC Hardware Speculation
  • Sign In With Google
  • F8 High Level Overview
  • Facebook and the Signal-to-Ads Cycle
  • The Facebook Platform
  • Android Silver
  • Box Delays IPO
  • Facebook AppLinks Follow-up

To read all of these updates and to receive future updates, please visit the membership page and sign up!

I’d like to thank all of Stratecher’s subscribers for their support, and for making this site possible.

  1. There is also an access option for $30 per month/$300 per year which gives you access to me personally to ask about the topic of your choosing, a private message board, and virtual and in-person meetups ↩

Twitter’s Marketing Problem

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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.

This actually is about what I predicted back when Twitter announced their IPO. From There Are Two Twitters; Only One is Worth Investing In:

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:

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.

How Google Can Steal Facebook’s Candy

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I wrote a piece on Bloomberg View about Facebook’s vulnerability when it comes to their chief money-maker: app-install ads.

Facebook runs the risk of becoming the second option for the sorts of advertisers that are currently its best customers. Facebook has made several acquisitions that will help them gain more insight into in-app behavior, most notably Parse, and is restarting its F8 developer conference to encourage app developers to incorporate Facebook, but will always be at a disadvantage to the app-platform owners when it comes to understanding actual app usage.

Ultimately, Facebook is doing far better on mobile than most predicted just a couple of years ago, given that it doesn’t actually own the underlying platforms. Yet that doesn’t mean concerns about its future in a mobile-driven world were unfounded. Apple and Google will always know the most about consumer behavior relative to apps, and Google, in particular, won’t hesitate to use it.

You can read the whole thing here.

Stratechery.FM Episode 003: Net Neutrality

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In Episode 3 of the official Stratechery Podcast, co-host Jon Nathanson and I go deep on Net Neutrality, including:

  • The Economic of ISPs
  • The role of the market versus the role of the government
  • U.S. versus the rest of the world
  • Utility versus fast lanes versus pay-per-MB
  • Google Fiber

Head on over to Stratechery.FM for the show notes, including time markers.

Podcast Feed | iTunes Link | @stratecheryfm

The Problem with Payments

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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

How new payment systems are — or are not — adopted
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.

  1. Along with TV ↩

  2. I didn’t calculate the card markup fee; presumably Square gets a very favorable rate ↩

  3. Said fees are Stratechery’s largest cost already ↩

  4. Although even then, it took decades ↩

  5. Credit cards are much more widespread now ↩

The Week in Daily Updates (Week 1)

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The content on Stratechery is free for all readers, but I also offer the Daily Update via email and RSS for $10 per month/$100 per year.1 This is a selection of items that were sent out in this week’s Daily Updates. To sign up, visit the Membership page

Twitter Launches Ad Network

(Posted on Monday, April 21)

Speaking of Twitter and ad networks, they actually beat Facebook to the punch, launching, and I quote their terrible headline, “A new way to promote mobile apps to 1 billion devices, both on and off-Twitter”. From the post:

We are excited to announce new ways for marketers and developers to drive app installs and app engagements using our new mobile app promotion suite: both on Twitter and off-Twitter through thousands of mobile apps that use MoPub’s mobile advertising exchange.

This offering gives marketers unparalleled scale across the mobile ecosystem. The MoPub Marketplace reaches more than 1 billion unique devices and handles more than 130 billion ad requests inside Android and iOS applications every 30 days, making it one of the largest mobile ad exchanges in the world. Advertisers can now choose to run simultaneous marketing campaigns to more than 241 million active users on Twitter, and to more than 1 billion mobile devices off-Twitter, through one interface at ads.twitter.com.

While Facebook’s ad network is, I’m guessing, broader than just app installs, the reality is that app installs dominate Facebook’s mobile revenue as well. And, the primary types of apps that advertise for installs are free-to-play games, looking for the specific customer type who will potentially spend hundreds of dollars on in-app purchases.

This, then, raises a frightening specter for both Twitter and Facebook: they are indirectly exposed to any changes Apple or Google may make in their policy with regards to in-app purchases

Google Helping to Pay Samsung’s Legal Costs

(Posted on Wednesday, April 23)

Significant news from the Apple-Samsung patent trial. From Recode:

A Google lawyer testified on Tuesday that the software maker, pursuant to its contractual obligations, agreed to take over defense of some of the claims in Apple’s current patent lawsuit as well as to indemnify Samsung should it lose on those claims.

Apple played deposition testimony from Google lawyer James Maccoun, who verified emails in which Google agreed to provide partial or full indemnity with regard to four patents as well as to take over defense of those claims.

Details of when or why Google agreed to do this are scarce, but I suspect this was part of the series of agreements Google signed with Samsung back in January around sharing IP and agreeing on a common UX. At the time many contended that Google had forced Samsung into a deal; after all, didn’t Google clearly hold all of the cards?

I have never thought this was the case; as Google discovered with Motorola, making and selling phones at scale is very, very difficult. You have to manage a supply chain, maintain carrier and channel agreements, market, and a great deal more. The reality is that Google needs Samsung – by far the leading provider of Android GMS phones – just as much as Samsung needs Google. While I didn’t have any specific knowledge of those January agreements, it only ever made sense that both parties were benefitting in some way. I highly suspect Google’s support in this and other lawsuits was one of the ways Samsung benefitted.

Qualcomm Disappoints

(Posted on Friday, April 25)

Qualcomm also reported results yesterday, but came in low:

Qualcomm Inc on Wednesday posted its smallest quarterly revenue increase since 2010 as it wrestles with a smartphone market that is losing steam and shifting to China, sending its shares lower.

With expansion in the smartphone industry moving away from wealthy markets such as the United States and toward China and other developing countries, where consumers favor less expensive devices, Qualcomm’s once-impressive revenue growth is tapering off and it is focusing on costs to preserve its profitability.

Qualcomm’s story is the same as Samsung’s: the high end, price-insensitive part of the market is owned by Apple, leaving everyone else to compete on price. And, in that competition, one of the best ways to save money is to use MediaTek SoC’s instead of the much higher-priced (albeit better performing) Qualcomm SoC’s.

This is also interesting for the implications it has for Intel, whom Qualcomm recently passed in valuation: I’ve long argued that Intel should give up on designing mobile chips and instead focus on manufacturing them; Qualcomm’s results make me even more sure this is the preferred strategy. As long as Apple owns the high end – and their dominance is only growing – any remaining value in chip design is going to be squeezed out anyways.

The full list of topics covered this week in the Daily Update include:

  • Twitter Acquires Gnip
  • Facebook to Launch Ad Network
  • Twitter Launches Ad Network
  • Microsoft/Nokia Deal to Finally Close
  • How Much Money is in Cloud Services?
  • Amazon Sales Hurt by Sales Tax
  • Google Helping to Pay Samsung’s Legal Costs
  • Tempering Expectations for Ad-Based Chinese Tech Firms
  • Google to Offer Targeted Mobile App Installs in Search and YouTube
  • Apple’s Earnings (750+ words!)
  • Apple Changes Capital Structure
  • Facebook’s Earnings
  • Microsoft’s Earnings
  • Qualcomm’s Earnings
  • Amazon’s Earnings

To read all of these updates and to receive future updates, please visit the membership page and sign up!

I’d like to thank all of Stratecher’s subscribers for their support, and for making this site possible.

  1. There is also an access option for $30 per month/$300 per year which gives you access to me personally to ask about the topic of your choosing, a private message board, and virtual and in-person meetups ↩

Don’t Give Up on the iPad

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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

  1. I know this sounds like Tim Cook making excuses, but it’s a very real thing ↩

  2. Even though the reduction of affordances in iOS 7 made the operating system unnecessarily harder to use ↩

  3. 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 ↩

Stratechery.FM Episode 002: Fat as a Service

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In Episode 2 of the official Stratechery Podcast, co-host Jon Nathanson and I discussed:

  • How Nike and Apple both sell experiences
  • What it’s like to work at Apple
  • The new luxury market
  • Wearables
  • A brief update on Stratechery’s business

Head on over to Stratechery.FM for the show notes, including time markers.

Podcast Feed | iTunes Link | @stratecheryfm

Note: The podcast is free. Sorry for any confusion caused by launching it at the same time as this site’s membership program

Apple and Nike

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What kind of company is Apple, anyway?

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.

  1. 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 ↩

  2. Eddy Cue joined the Ferrari Board of Directors in 2012 ↩

  3. Yes, I’m quite aware of how that turned out ↩

Free Stratechery and the Daily Email

Posted on

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.