The Best Analogy for Chromebooks are iPads

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In response to yesterday’s post about Chromebooks and the Cost of Complexity, Vance McAlister passed along this great post of his that nailed what is so appealing about ChromeOS:

The true value in ChromeOS is what it DOESN’T have. Critics say “a Macbook or Windows laptop will give you the same Chrome browser, plus a lot more as well!”, but that misses the point entirely. Those laptops don’t come with the killer feature of ChromeOS: the LACK of a traditional OS.

The lack of a traditional OS means you do not have to deal with the myriad frustrations of Windows, Mac or even Linux. You get instant on, constant updates, no registry corruption, no accumulated accretions and eventual slowdowns, no viruses and conflicts. In theory, as long as the hardware holds up, a ChromeOS device will be as slick and responsive in five years as it is out of the box.

Bingo. This is why two of the most repeated claims about Chromebooks completely miss the point:

  • Using a Chromebook = Using the Chrome browser on a Mac or PC No, it doesn’t. As McAlister wrote, you don’t have to deal with any of the OS cruft1 endemic on all other operating systems. Moreover, there are aspects of ChromeOS that make the browser experience better, particularly the ability to put Chrome web apps2 in the taskbar and launch them in their own window; you effectively have two hierarchies of navigation for web pages: tabs and taskbar icons.
  • Chromebooks = Netbooks Actually, they are the exact opposite sort of experience. Netbooks had a full operating system crammed into tiny cheap hardware. They were terrible. Chromebooks have similar hardware to Windows PCs (or similar to Macs, in the case of the Pixel), but with a dramatically simpler and more lightweight user experience. It’s “inexpensive”, not “cheap”, because the experience isn’t compromised.

In fact, the best comparison for a Chromebook is not a Windows PC, but an iPad. Both are appliance-like devices that are easy-to-use, impossible-to-break, and designed first and foremost for the experience, not the feature list. And, if you write like Dr. Drang and need multiple windows, a Chromebook is in fact superior to the iPad.

Ultimately, as I wrote in The (Alleged) 13-inch iPad and the Triumph of Thin Clients, I think we’re headed to a multiple-appliance future:

Today’s thin clients, on the hand, specialize. A pure tablet is superior for touch-based applications; a pure PC is superior for keyboard-and-mouse ones. An e-ink reader is superior for reading, and a 13-inch iPad would be superior for (in my case) drawing and making music. And while many people now use two devices, I think that’s only the beginning (I’m personally at four and the 13″ iPad would be number five).

I wrote that post having lived a month with nothing but a Pixel3 and an iPad, and while I’m back to a MacBook Pro for work, that doesn’t invalidate the Chromebook. I simply prefer the best tool for any particular job, not a Swiss Army Knife. I’m continually surprised that so many geeks in particular assume the latter is inevitable.

As for the normals,4 I think the biggest challenge for Chromebooks is a marketing one; OEMs aren’t exactly clued in to the idea that less is more, and are more likely to overpromise functionality instead of being honest with potential buyers about what a Chromebook can’t do.5 And that’s a shame: dealing with a once-a-month Excel spreadsheet6 can be either a momentary annoyance or a massive frustration, based on nothing more than your expectations.

  1. This is why I never use touch on the Pixel, despite liking it on Windows 8; it turns out most of my touch interactions were with dialog boxes and the like, which just don’t exist on ChromeOS. That and the fact the great trackpad makes scrolling a breeze ↩

  2. This guide shows you how to create a local Chrome web app out of any website ↩

  3. Speaking of the Pixel, McAlister nails it:

    If you are one of those lucky ones NOT tied to a traditional OS and can happily live full time in ChromeOS, then why should you be relegated to inferior hardware? If ChromeOS is the right OS for you, shouldn’t you have the option of a high-end machine as much as a Mac or Windows user? Why would this seem odd?

    Made sense to me, and (but for the crappy battery life) I couldn’t be more pleased with my Pixel ↩

  4. Chromebooks make great guest computers if people ever want to borrow a computer; my parents stayed a week and my dad simply logged on with his Gmail account and was happy as a clam, with zero effect on me. Also, there is a guest login that doesn’t require any Google account at all ↩

  5. Enterprise and institutional buyers (i.e. schools) on the other hand, are well-informed and are already driving Chromebook adoption ↩

  6. Hint: use the Skydrive.com web-based Office apps ↩

Chromebooks and the Cost of Complexity

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While there is a question of degree, it seems quite certain that Chromebooks had a pretty good 2013. Many are attributing this to price – most Chromebooks cost $300 or less – and they’re almost certainly right. It seems like yet another case of disruption: a cheaper, inferior product enters the market against a competitor with margins to protect, and over time becomes “good enough”.

The path of disruption looks something like this:

Adapted from Figure 5-1 in the Innovatorʼs Solution, Christensen, Raynor
Adapted from Figure 5-1 in the Innovatorʼs Solution, Christensen, Raynor

The key thing to notice is that products improve more rapidly than consumer needs expand. This means that while the incumbent product may have once been subpar, over time it becomes “too good” for most customers, offering features they don’t need yet charging for them anyways. Meanwhile, the new entrant has an inferior product, but at a much lower price, and as its product improves – again, more rapidly than consumer needs – it begins to peel away customers from the incumbent by virtue of its lower price. Eventually it becomes good enough for nearly all of the consumers, leaving the incumbent high and dry.

Like I said, Chromebooks fit this pattern perfectly: they do a lot less than PCs, but at a much lower price. Still, though, that doesn’t explain why I love the Chromebook, why the Pixel is my favorite product of 2013, and why Microsoft is missing the point.

Before I started this blog, I wrote an email review of the $250 Samsung ARM-based Chromebook. I just added that review to the archives – you can read it here.

I was quite effusive in my praise:

It turns out nearly everything I use a computer for is easily accomplished in a browser (but for one thing, and we’ll get to that later), and there is no better computer if all you want to do is use a browser.

Stepping back, that sentence is obvious: anything that is custom-made for one thing is likely to be better than something that is general purpose, and so it is in this case. Using a Chromebook feels light; there’s no system overhead, no juggling windows, no worrying about updates. It’s really hard to describe but I’m trying hard, because this feeling of lightness is ever so close to joy and makes the Chromebook delightful.

To be clear, not only does the Chromebook do just about anything I would want to do on a computer, it does so with basically a 0% chance of my screwing something up, or not understanding what is happening. I can only imagine what the feeling is amongst those who are scared of computers.

Still, though, I ultimately concluded that I would stick with a regular laptop.

I’m sure it’s obvious that I’ve been rather smitten by the Chromebook, certainly much more so than I anticipated. But no, I won’t buy a Pixel. It turns out I have a DSLR camera, and I shoot in RAW and depend on Adobe Lightroom to import my photos. That doesn’t run on a Chromebook, and never will (for that matter, it doesn’t run on an iPad either). And so, my next big purchase will be a new laptop; 95% of what I will use it for could have been done on a Chromebook, but that 5% is a killer.

This is the part where I tell you this article is being written on a Pixel (as have the vast majority of the articles on this site). And I love it.

What I got wrong in that conclusion was the same mistake nearly everyone in technology makes: I assumed that, money being equal, having it all – or, more accurately, more than I needed – was inherently better than having less.

In disruption theory, the primary problem with the incumbent’s strategy is that the high-end product is simply too expensive relative to the increasingly good-enough new entry. But there is more going on than just price. Anytime you increase performance (which in this context, is perhaps better expressed as “features”), you are almost always trading away simplicity.

The Performace/Complexity Tradeoff
The Performace/Complexity Tradeoff

To take an extreme example, look at the iPhone: iPhone OS 1 was much less capable – no copy-and-paste, no multi-tasking, no app store – but it was also much simpler than any version that followed. And, as this example highlights, sometimes more complexity is a trade-off worth making.

The problem, though, comes when you overshoot your customer’s needs. In that case, it’s not simply that the additional performance is not valued by your customers; rather, the bigger problem is that the additional complexity that necessarily accompanies said performance is actively harmful to your customer’s user experience. Your product is not only becoming more expensive, but it’s actually becoming worse from your customer’s point-of-view.

The additional performance is not valued but the additional complexity is actively harmful to the user experience
The additional performance is not valued but the additional complexity is actively harmful to the user experience

Meanwhile, the new entrant may not have all of the required performance – like my Chromebook – but along with that missing performance comes additional simplicity. Paradoxically, the fact the new entrant has less-than-desired performance makes it even better from a user experience standpoint. And, when the performance gets close enough, that user experience advantage makes it an obvious choice over a higher end product that does more, in every sense of the word.

While the lack of performance may occasionally be annoying, it is offset by the increase in simplicity
While the lack of performance may occasionally be annoying, it is offset by the increase in simplicity

And so, that’s why I have a Pixel. Over the next few weeks after I wrote that review, I found myself continually picking up that little Samsung instead of a laptop. I realized I quite preferred the simplicity and clarity of Chrome OS, and given that, and given the important role that computers play in my life, why wouldn’t I buy the best hardware to run said OS? My old laptop suffices for the few moments I even bother to pull out my SLR.

Clearly Microsoft sees the threat: ad-time during the NFL playoffs does not come cheaply, yet they thought it the appropriate venue to run this:

There is a longer version on the Scroogled website, but the above clip has the pertinent line:

“It doesn’t have Windows, or Office”

It has less, yet because of the web it still has just about everything today’s consumers need. Moreover, because it has less, it’s vastly easier – and safer – to use.1 Once you include all of the variables, including the user experience, it’s not an equation that favors Microsoft either now or especially in the future, as the web becomes ever more capable even as Windows becomes ever more complex.

  1. This is also why the iPad so quickly disrupted PCs despite costing as much as a low-end laptop. ↩

The 2013 Stratechery Year In Review

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Stratechery launched on March 25, 2013 with the post Welcome to Stratechery. While I had somewhat prepopulated the blog with old content (including a piece on the original iPad and a research paper on Apple and the Innovator’s Dilemma), the vast majority of my 203 posts and linked-list items came after that date. Here’s a quick summary of the highlights:

From "Welcome to Stratechy"
From “Welcome to Stratechy”

The Five Most-Viewed Articles:

  1. If Steve Ballmer Ran Apple – Most view Steve Ballmer’s tenure at Microsoft as a mixed bag: increased revenue and profits, but multiple missed opportunities. I argue these results are intertwined.
  2. The Deal That Makes No Sense – Because this blog is a hobby, I rarely have the time to jump on a story as it breaks. This, written about Microsoft’s acquisition of Nokia, was an exception.
  3. Jony Ive is Not a Graphic Designer – A short piece with an extended Jony quote and my predictions for the as-yet-unannounced iOS 7.
  4. Why Microsoft’s Reorganization Is a Bad Idea – Microsoft reorganized itself from a product-based company to a functionally-organized one. While the move makes sense in theory, I don’t think it fits at all with the reality of today’s Microsoft.
  5. Whither Liberal Arts – I was tremendously disappointed in the story Apple told – or, more accurately, failed to tell – about the iPad in its fall event. (The conclusions here are in marked contrast to the 6th most popular post, Tim Cook is a Great CEO).
From "Why Microsoft's Reorganization is a Bad Idea"
From “Why Microsoft’s Reorganization is a Bad Idea”

Five Big Ideas

From "The Social/Communications Map"
From “The Social/Communications Map”

Five More Favorites

  • Apple the Black Swan – Wall Street doesn’t understand Apple, because it bases its business on qualities that can’t be measured.
  • The Intel Opportunity – Intel has a new CEO, who is facing a similar situation to that faced by Andy Grove when he becamse CEO in the 1980s.
  • Friction – The Internet is removing friction from everything it touches, but that’s not always a good thing.
  • The Magical iPad – The iPad is a truly unique device, able to transform into whatever you wish it to be.
  • Christmas Gifts and the Meaning of Design – Christmas gifts are a great analogy for understanding the difference between traditional market research and design thinking.
From "Christmas Gifts and the Meaning of Design"
From “Christmas Gifts and the Meaning of Design”

Happy New Year. I’m looking forward to a great 2014.

Christmas Gifts and the Meaning of Design

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Gifts are a funny thing.

A year ago, for Christmas 2012, my wife “gave” me an iPad mini. I use quotes because I actually bought it; supply was constrained, and when we got a notification that there were models in stock, I quickly dashed over to my local Apple Store1 and picked one up. It was a great present, and I used it happily for the next year.

Still, though, what really made me happy on that December 25 was a simple hat:

One of my all-time favorite gifts (this isn't the exact hat, but it's close enough)
One of my all-time favorite gifts (this isn’t the exact hat, but it’s close enough)

Knowing my fondness for headware that makes me look like I’m 50, my wife had surreptitiously ordered another gift, and it totally made my day when I opened it. I was surprised, and I was delighted to receive something I loved but hadn’t even considered. It was a better gift than the iPad, even though any sort of “gift analysis” would suggest the exact opposite.

I would imagine nearly all of you can relate to this story: we make lists of what we want, and hope our loved ones follow it, but truthfully, the presents we really love are things we never would have thought to ask for.

However — and this is the rub — it’s a big risk to buy something unasked for. There’s always the chance that your gift will crash-and-burn; to give something that surprises and delights takes great thought, empathy, and a true understanding of the giftee, and most of us quickly retreat to the safety and ease of the list.

Gift-giving is a great example of the “uncanny valley” framework I’ve referenced with regards to Microsoft and Twitter. The “good” option is buying off the list; the “great” option is buying something even better; the “bad” option is getting it wrong, and you have to risk just that to go from good to great.

The Uncanny Valley of Gifts
The Uncanny Valley of Gifts

I also think gift-giving is a useful metaphor for thinking about the difference between design thinking and market research when it comes to the development of new products. “Marketing”, properly defined, is about a great deal more than just advertising. Rather, it’s about knowing and understanding your market, and developing products that fit that market. The traditional tools in this sort of work are what you might expect: surveys, interviews, focus groups, etc. After all, the best way to give the customer what they want is to, well, ask them what they want! Moreover, things like focus groups and survey results are really useful for winning arguments internally. If you want your vision of the product to win funding and support, there’s no greater weapon than a nicely presented chart showing that prospective customers demand such and such a feature.

This is the way the vast majority of businesses, both within tech and without, operate when it comes to new products. And it’s successful! Customers ask for X, the company makes it, and the customer buys it — if it comes in at the right price, of course. Because that’s the downside of developing based on characteristics and features that can be articulated by your customers: they can articulate those same characteristics and features to your competitors, and let you duke it out with all of them until the marginal profit of your product approaches zero.

Approaching a problem with a design thinking mindset, however, certainly takes into account what a customer says, but simply as one input among many. In this approach, observing the way people really live, developing a deep understanding of the real problems they have, and gaining an appreciation of the “hacks” they devise to overcome them can deliver an understanding of prospective customers’ needs that is more accurate than what any of those prospective customers could ever articulate on their own.

And then, from that understanding, an entirely new, highly differentiated product can be delivered that surprises and delights.2 From a business perspective, the emotion and attachment said product inspires breaks down price sensitivity and builds brand attachment, and inspires the sort of viral marketing that can’t be bought.

The brands that resonate, that people love — most famously Apple, of course, but there are other examples3 — are those that suprise and delight. In fact, those words are a central tenet at Apple, and one of the primary standards by which all products are measured. What few appreciate, though, is that when Steve Jobs bragged about not doing market research or not holding focus groups, he was not saying Apple did less than the competition; rather, they did so much more.

It is this lack of understanding and appreciation for the very hard work and deep thinking required to surprise and delight that leads to countless companies and Steve-Jobs-wannabes crashing-and-burning, even as they declare their fealty to design. What they don’t understand is that design is not just about looking good, or working well, or even being easy-to-use. The most fundamental part of design is truly understanding your customers at a deeper level than they even understand themselves. Moreover, to truly be design-centric is harder than being market-centric. Things like surveys and focus groups persist because, while the products that result may not inspire love, they don’t inspire hate – or worse, apathy – either.

It is wonderful to see so many new products that are beautiful and easy-to-use. But great designs are as rare as ever — just as rare as those gifts that occupy an outsized place in your memory relative to their monetary or symbolic worth simply because someone took the time and effort to truly understand you.

  1. I was living in the US at the time ↩

  2. This is where I have a hard time with those who argue for the complete abolishment of patents; I want to preserve this reward ↩

  3. P&G is one of my favorites; the development of the Swiffer mop is a great example of this process ↩

The China Mobile iPhone is specific to China Mobile

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The China Mobile iPhone deal is official. From Apple’s press release：

Apple® and China Mobile today announced they have entered into a multi-year agreement to bring iPhone® to the world’s largest mobile network. As part of the agreement, iPhone 5s and iPhone 5c will be available from China Mobile’s expansive network of retail stores as well as Apple retail stores across mainland China beginning on Friday, January 17, 2014. iPhone 5s, the most forward-thinking smartphone in the world and iPhone 5c, the most colorful iPhone yet, will be available for pre-registration from China Mobile’s official website (www.10086.cn) and customer service hotline “10086” beginning on Wednesday, December 25, 2013.

“Apple’s iPhone is very much loved by millions of customers around the world. We know there are many China Mobile customers and potential new customers who are anxiously awaiting the incredible combination of iPhone on China Mobile’s leading network. We are delighted that iPhone on China Mobile will support our 4G/TD-LTE and 3G/TD-SCDMA networks, providing customers with high-speed mobile service,” said Xi Guohua, China Mobile Chairman.

“Apple has enormous respect for China Mobile and we are excited to begin working together. China is an extremely important market for Apple and our partnership with China Mobile presents us the opportunity to bring iPhone to the customers of the world’s largest network,” said Tim Cook, Apple CEO. “iPhone customers in China are an enthusiastic and rapidly growing group, and we can’t think of a better way to welcome in the Chinese New Year than getting an iPhone into the hands of every China Mobile customer who wants one.”

In my earlier post about the impact of this deal, I wrote that Apple would make a new iPhone model specifically for China Mobile:

The China Mobile iPhone will be a BIG upgrade – and it will only be available in China. There have been reports that there are as many as 45 million iPhones on China Mobile’s network, and every single one of those runs at EDGE speeds thanks to China Mobile’s use of the aforementioned TD-LTE/TD-SCDMA networking. It’s fair to wonder how much customers value LTE>3G, but LTE>Edge is a massive upgrade indeed; all of those 45 million customers are prime candidates for the China Mobile iPhone.

Moreover, calling it the “China Mobile iPhone” is not an accident. This is a third version of the iPhone that will only be available for sale in China. There will be no gray market undercutting iPhone sales as is the case for China Unicom and China Telecom. At the very least, this fact alone will provide a nice boost to Apple’s quarterly China numbers.

Some on Twitter challenged this assumption, and I backtracked a bit in a follow-up piece I wrote. However, a little birdie has told me this is indeed a new set of SKUs that is specific to China Mobile.

Part of the confusion comes from the fact iPhone 5C Model A1529 and iPhone 5S Model A1530 do cover bands 38-40 and are already being advertised as working on China Mobile’s 4G network:

A sign in a China Mobile store that says 4G service is available for iPhones 5S/5C bought in Hong Kong (Models A1530/A1529). Image from Lawrence Li.
A sign in a China Mobile store that says 4G service is available for iPhones 5S/5C bought in Hong Kong (Models A1530/A1529). Image from Lawrence Li.

However, full coverage requires band 41, and contrary to the Forbes article that I referenced in my follow-up, that does necessitate a new model, not just a baseband upgrade. For those counting, that’s 19 more SKUs.

Some other notes:

  • I never noticed before that Apple uses the ‘®’ in all their press releases. They famously eschew it elsewhere
  • I’m pretty sure China Mobile is the only carrier “Apple has enormous respect for.” Of course, for China watchers, the only thing exceptional about that statement would be its absence
  • Tim Cook noted the upcoming Chinese New Year, which this year falls on January 31. It’s great that the iPhone will be available, but while Chinese New Year is often compared to Christmas, it does not entail exchanging gifts; rather, money is given (in traditional red envelopes). Of course, said money could certainly be used on a new iPhone
  • As I noted in my first article about China Mobile and the iPhone, this is a big deal for demographic reasons alone. It doesn’t matter that a large percentage of Chinese can’t afford it; a huge absolute number can
  • I presume this deal is already priced into the stock. It’s been obvious it was coming for some time now. I wouldn’t expect a big jump

UPDATE: Brian Klug dug up the iPhone’s network approval, which references two new model numbers:

These were from back in September, and were the primary reason I’ve been certain about this deal’s imminent arrival.

Misunderstood

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Apple just posted their holiday iPhone commercial:

This is what I’m talking about. It’s not about specs, it’s not about thinness, it’s about what those physical properties make possible for real people.

Now please do the same for the iPad (which has always been harder to advertise).

Previously:

  • Whither Liberal Arts link
  • The Magical iPad link
  • Whose iPad Life link

UPDATE: While reaction around the web is largely positive, I’ve also seen a fair bit of snark along the lines of “Apple is promoting recording your family over actually spending time with your family”, or something to that effect. And, I suppose it is true that it’s advantageous from Apple’s perspective for incessant iPhone use to be seen as a good thing.

But I think that’s a touch too cynical, and misses the impact of this ad. What make this ad so powerful is that it is so, so real. Oh sure, the perfection of the recording and the happy coincidence of the grandparents having an AppleTV is perhaps not so plausible, but the idea of a teenage son being disconnected, yet ultimately, deep down inside, still caring, will touch the soul of parents – and young adults – in a way few ads ever will. This shot captures it:

Mom is in tears after seeing the video
Mom is in tears after seeing the video

There are countless moms and dads out there who desperately want to connect with their children, who fear the best days are already past, and worry about the kind of person they are becoming.

On the flipside, how many young people – including, I’d wager, many reading this blog – have parents who just don’t get us, who see technology as a threat, best represented by that “can-you-put-that-damn-thing-down-and-join-us-in-the-real-world!?” smartphone in our hands, without any appreciation that it’s that phone and the world it represents that has allowed us to find ourselves and become the person we know they wanted us to be? And that we do care, just in a way that makes sense to us and can’t they see that?

By letting go of tangible product features – and, by exploiting a brand promise developed over the last decade1 – Apple is associating its flagship product with the happy resolution of that deep-seated longing on both sides, resulting in an emotion far more real than any possible articulation of a feature or spec.

This is advertising at its finest.

  1. This is the necessary precondition that makes it impossible for most companies to pull off an ad like this ↩

Subsidization and Saturation

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Thanks to AT&T CEO Randall Stephenson, subsidies are once again in the news:

AT&T’s top executive says the era of big subsidies for devices is coming to an end, as wireless operators can no longer afford to fund a constant smartphone upgrade cycle.

Speaking at an investor conference in New York City on Tuesday, AT&T CEO Randall Stephenson said that with smartphone penetration at over 75 percent and soon reaching 90 percent, wireless operators need to work harder to get customers to use more of the network rather than simply getting on the network.

“When you’re growing the business initially, you have to do aggressive device subsidies to get people on the network,” he said. “But as you approach 90 percent penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can’t afford to subsidize devices like that.”

Last week, AT&T introduced a new pricing plan that offers an incentive to customers who keep their older phones, allowing them to save $15 a month on their service bill.

The knee-jerk reaction of many, particularly Apple bears, was to paint this as the end of subsidies. This, of course, is nonsense.

  • First off, as Jean-Louis Gassee notes today, the very word “subsidy” is problematic:

    I don’t know if Stephenson is speaking out of cultural deafness or cynicism, but he’s obscuring the point: There is no subsidy. Carriers extend a loan that users pay back as part of the monthly service payment. Like any loan shark, the carrier likes its subscriber to stay indefinitely in debt, to always come back for more, for a new phone and its ever-revolving payments stream.

  • As Horace Dediu has written multiple times, most recently today, subsidies are the carriers best friend.

    It may be an illusion, but a cheap phone (with a long-term contract) is a fundamental innovation devised by telco operators even before the phone became mobile. Operators have come to love it and no matter how many technology generations go by; how many family plans, bucket plans, weekend minutes, rollovers, and data packages; no matter how many tweaks and re-brands the model gets, it will persist. There simply isn’t sufficient win-win value in alternatives.

  • The iPhone is a particularly special case: as I wrote last April, it not only helps carriers sell network access – as does any smartphone – but it also punishes carriers who refuse Apple’s demands by virtue of Apple’s customer loyalty:
    • The carriers see the iPhone as a strategic threat because Apple owns the customer relationship; the carrier is reduced to a utility. Therefore the leading carriers do not carry the iPhone
    • Customers strongly prefer the iPhone; in fact, they prefer it so much that they switch carriers to get the iPhone (something that is very difficult and rare). Second-and-third place carriers add the iPhone in order to steal customers from the leader
    • The leading carrier is forced to choose between losing the customer relationship to Apple or losing the customer completely

    The fact that iPhone users are fabulously profitable makes this situation (and the associated subsidies) tolerable.

So Stephenson’s speech was so much bluster and safe to ignore, right?

Actually, not quite so fast. To be sure, Stephenson was being quite duplicitous, but the true meaning behind AT&T’s recent actions speak to a very important shift happening in the telecom industry, and the US is in the forefront: smartphones are reaching saturation, and that means the end of easy earnings growth for telecoms.

Broadly speaking, there are three ways to grow: increase prices, lower costs, or gain new customers. The iPhone was such a coup for AT&T because it accomplished two of those: the Average Price Per User (ARPU) of an iPhone user was significantly higher than a feature phone user (increased prices), and AT&T stole Apple-loyal customers from the other carriers, particularly Verizon (gain new customers). Over time, more smartphones came into the market, and the iPhone spread to other carriers, but all those smartphones had the same higher ARPU. AT&T and all the other carriers could achieve earnings growth simply by selling feature phone customers smartphones and the associated higher monthly fees that accompanied them.

That gravy train is nearly over though, and once it becomes more difficult to raise prices (because there are no more feature phone customers to upgrade to smartphones), the remaining option for growth is gaining new users. And, given the fact that nearly everyone in America will soon have a smartphone, that means stealing customers from other carriers.

In fact, it’s this dynamic that explains AT&T’s decision to reduce your phone bill by $15 once your phone is fully paid for. This is obviously a response to T-Mobile’s “uncarrier” initiative which clearly delineated what you paid for cell phone service from what you paid for your phone, and quite successfully at that:

T-Mobile US Inc, the No. 4 U.S. mobile provider, reported much better-than-expected subscriber growth, outpacing bigger rival AT&T and also putting pressure on other competitors, including market leader Verizon Wireless.

This was the second straight quarter of growth after four years of customer losses at T-Mobile US, which is 74 percent owned by Deutsche Telekom AG. It made inroads against bigger rivals by criticizing them in its marketing and selling itself as more consumer-friendly with cheaper prices and more flexibility.

Make no mistake – AT&T would rather not give this discount (and that is what makes Stephenson’s remarks duplicitous); until now, smartphone customers spent some number of months paying off their phones with higher bills, and then, once the phone was paid for, postpaid subscribers effectively gave AT&T cash equivalent to their phone’s monthly payoff amount because they didn’t know any better. People who kept phones longer than two years, for example, presuming that ~$20 of every month’s bill was intended for phone payoff, effectively gave AT&T et al. $240 of pure profit in that third year. T-Mobile exposed that, and AT&T is giving some of that money back.

This has interesting implications for smartphone manufacturers. As a group, it is bad news; alerting customers to the fact they can save money by not buying a new device increases the likelihood customers find their current phone “good enough.” As Microsoft is painfully learning in the PC world, any extension in device replacement time is a loss.

For Apple, though, while this bad news does apply to them equally, they on balance come out better than their competitors by virtue of selling the most expensive devices. In other words, $20 of your AT&T bill may go to pay for your iPhone, while only $14 goes to pay for your HTC. But, because AT&T is pricing the discount at $15 regardless of your phone, the iPhone’s higher price will continue to be disguised from consumers, to the benefit of Apple’s margins. Update: As Sameer Singh pointed out on Twitter, AT&T is in fact exposing the price of the devices, just as T-Mobile is. I will expand on the implications of this tomorrow, but it is not as good for Apple.

Ultimately, smartphone saturation is good news for consumers and bad for device manufacturers and carriers. Carriers have spent the last 6 years competing not for each others’ customers but rather in their efficiency in wringing more money out of their existing customer base through smartphone sales. Moving forward, though, the best means for growth is stealing customers, and the increase competition will mean lower prices and more transparency of the sort we are already seeing from T-Mobile and AT&T.

Instagram Direct, Twitter DMs, and the Social/Communications Map

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Instagram today announced Instagram Direct. From the Instagram blog:1

From a photo of your daily coffee to a sunrise shared from the top of a mountain hike, every Instagram moment contains something you find special—something you broadcast to your followers when you tap “share.”

There are, however, moments in our lives that we want to share, but that will be the most relevant only to a smaller group of people—an inside joke between friends captured on the go, a special family moment or even just one more photo of your new puppy. Instagram Direct helps you share these moments.

Two days ago, Twitter launched elevated and enhanced direct messages. From the Twitter blog:

For the first time, you can share and view photos via direct message (DM) on your mobile phone. We’ve also introduced a new tab in the navigation bar that makes it easy to access DMs –– they’re just one tap away from wherever you are on Twitter. You can also view photos in DMs on twitter.com.

You don’t need a framework to realize these are very similar products, and likely similar motivations. But frameworks do help to understand exactly why Facebook/Instagram and Twitter are moving in this direction, and so I’ve updated the Social/Communications Map in light of this announcement:

The Social/Communications Map
The Social/Communications Map

First, a couple of updates to the map itself:

  • I added a blue line extending from Facebook’s original location in Permanent/Symmetric to account for their shift over the years to a more Asymmetric model, at least in some respects. They really do play in both spaces; both, however, are public and permanent
  • Each service has various letters that describe the functions of that service
    • T = asynchronous text messaging
    • P = photos
    • V = video
    • C = chat specifically, but it really stands for real-time communications of all types

    The order matters: whatever is first was the primary means of communication for each service when it became large; others were added over time2

So, what just happened?

Both Twitter and Facebook/Instagram are making a mad dash for the (Private) Symmetric/Ephemeral space, currently owned by the “Big 5” messaging apps (WhatsApp, LINE, WeChat, Kakao, and Kik) and Snapchat.3 A few observations flow from this framework:

The most precious commodity is user time

When Facebook allegedly offered $3 billion for Snapchat, there was the usual griping about Snapchat’s lack of revenue. As I noted at the time, this completely misses the point. Revenue follows user attention, not the other way around; unlike money, there is a finite amount of minutes in the day, and a finite amount of users. To put it another way, attention is a zero sum game; every minute spent in Snapchat or LINE or WhatsApp is a minute not spent in Twitter or Facebook or Instagram.

Users care about people they know

There is a lot to like about interest-based relationships that form the foundation of services like Twitter and Instagram. As I wrote a few months ago when analyzing Twitter’s IPO:

Whereas Google is valuable because it knows what I want, when I want to get it, Facebook knows who I am, and who I know. Ideally, they also know who and what I like, but it’s a much weaker signal. Twitter, on the other hand, knows exactly what I like and what I’m interested in. It’s obvious both from what I tweet about, but especially based on who I follow.

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, though, is that the majority of users are clearly much more interested in who they know. That is why Facebook has always been an order of magnitude larger than Twitter, and it’s why user time is increasingly being spent on private messaging apps.

I sometimes feel that it’s on this point specifically that we geeks fall down in our analysis of social networks in particular. Many of us are so far removed in our interests and lifestyle from the places and people we grew up with that we under-appreciate the value “normals” place on their relationships with those they see in their day-to-day lives. At its core private messaging is communication with people we know, and in that light, the allure is easy to understand.

Messaging apps hit the sweet spot of mobile

Private messaging apps are, in many ways, the full realization of the potential of mobile computing. The reason why the mobile opportunity is so much larger than the desktop one is not that it’s better or easier; rather, it’s physical. A phone is always with you: on the bus, in between class, on the can. The “addressable market of time” is exponentially bigger than that available on PC, and it’s this that dictates the opportunity.

When you combine this addressable market of time with the aforementioned desire to connect with people you know, you have a massive market for private messaging. That is why these apps are devouring user time, and why Twitter and Facebook/Instagram feel threatened.

Facebook is locked out of this market

Once Snapchat rebuffed Facebook’s offer, a competing product was only a matter of time. It’s telling, though, that this was an Instagram announcement, not a Facebook one. As Facebook learned with its disastrous Poke product,4 Facebook is locked into the permanent space of the Social/Communications Map. Users assume that what happens on Facebook will follow them forever, and that’s rather limiting when it comes to ephemeral messaging.

Instagram, on the other hand, already sits in the more ephemeral space,5 even though it’s public. Facebook is clearly betting it will be easier for Instagram to sell privacy than it will be for Facebook to sell ephemerality.

I’m more bullish on Twitter DM’s than I am on Instagram Direct

Both Twitter and Instagram face the same challenge in moving into this space: both have been built on interest graphs, which by definition is more about broadcasting and less about conversation. Twitter though, given its text background and the fact that DM’s are not a new product, has seeded many a relationship that naturally extends to messaging.

Instagram, on the other hand, is about images, literal projections from a user, and what text exists (i.e. comments) is about said projection, not the user. It seems highly likely that any relationships that exists in Instagram are duplicated elsewhere, whether that be in a private messaging app (for people the user knows) or on Twitter (for people in the user’s interest graph). I don’t really see a foundation for private messaging, nor an upside that is meaningfully differentiated from what already exists.

Both, though, face an uphill slog against the private messaging incumbents.

  1. Which, strangely enough, does not have a favicon. Seems sloppy ↩

  2. Facebook started with text, but it was photos that really caused the service to explode ↩

  3. Skype is there, but they’re so far behind on mobile it’s not even worth paying attention ↩

  4. Disastrous because the main outcome of Poke was to raise Snapchat awareness ↩

  5. I’m talking about perception, not reality ↩

Intel’s Missed "Opportunity"

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Last week CNET ran an article about the first IPAD – you know, the one made by Intel. Unfortunately, the introduction ruins the entire piece:

The iPad is universally known as one of the most coveted consumer electronics devices on the market. But have you heard of the IPAD?

That would be Intel’s botched attempt at building a tablet — which nearly came out roughly a decade before Apple unveiled its first iPad. The device, which was dubbed Intel Pad, or IPAD for short, could browse the Internet, play music and videos, and even act as a digital picture frame.

Unfortunately, the operative word is nearly, as the IPAD was scrapped before consumers could get their hands on it. It’s just one of many opportunities that Intel has missed out on, which CNET has chronicled here.

For Intel, forgoing an early run at tablets is one of the company’s biggest blunders — especially given how quickly the business has grown. Here’s what was, and what could have been.

The rest of the article is genuinely interesting, but the very premise of these last few sentences is emblematic of what so much of tech reporting and analysis gets wrong.

In short, it’s not that Intel missed on the opportunity to build a tablet. It’s that they never had a chance. The iPad – the Apple one – is successful for many more reasons than its form factor. The touch interface, the OS, the ecosystem, the industrial design, the retail stores, the brand among consumers – all of these played significant roles, and Intel had none of them. There was no opportunity missed, because there never was an opportunity at all.

In fact, one could easily argue Intel’s obsession with consumer-facing products (even proof-of-concept ones) has been actively detrimental to the company as a whole. Intel has been convinced for years now that they are more imaginative and creative than their customers, and while that may have been justified with Acer, HP and the like, it seems likely they had the same attitude towards Apple as well. They certainly couldn’t have imagined something like the iPhone when they sold XScale, their ARM processing unit, a mere 8 months before the iPhone was announced. From an old news piece I dug up on Google (italics mine):

Though you may have not heard much about the Intel XScale processor, it is very commonly used in mobile devices and formerly made Intel the largest supplier of processors for 3G devices and new-age smartphones. I say formerly, because Intel is now selling their entire XScale line for $600 Million to Marvell who are commonly known for making other chipsets for wireless and ethernet devices.

That is a missed opportunity (which former CEO Paul Otellini copped to on his way out the door). There are some encouraging signs, though, from new CEO Brian Krzanich. First and foremost was the decision to dump their TV ambitions. From Reuters:

The project faced daunting challenges from the start, and Intel’s new CEO, Brian Krzanich, ultimately decided the company could not afford the distraction and expense, sources familiar with the decision told Reuters.

At his first annual investor day on Thursday, Krzanich is expected to discuss the growing use of chips in everyday devices, plans to breath new life into PCs, and Intel’s growing contract manufacturing business – but not Intel TV.

And for good reason. TV requires more than just a product; it requires content deals, distribution, a go-to-market strategy, and so much more. Intel has none of that; the entire endeavor was a distraction from the decisions Intel needs to make, and the focus it needs to have on the possibilities for its manufacturing business in particular.

As for CNET, well, they got this one wrong too:

Intel is just one company attempting – and failing – to change the TV industry, underscoring the difficulties involved with convincing the major players to move out of their comfortable and lucrative business models. There are lessons that can be gleaned from Intel’s botched project, lessons that should be heeded by the likes of Apple, Google, and Sony, which are all said to be chasing the same vision.

Their goal is to leap onto the biggest screen in the household, where Americans still spend the majority of their time watching media, and deliver what cable and satellite companies do now and more, all in one.

Luckily for them, the most crippling of OnCue’s problems was specific to Intel — apathy of new management.

That is precisely backwards. Intel under Otellini wasted far too much time, money, and energy on a future they had no business creating; a bit of “apathy” in exchange for paying attention to the core business would have done the company far better. It’s encouraging to see Krzanich moving in this direction.

Since Krzanich took charge, Intel’s TV project has dropped off the radar, except for reports of Intel attempting to sell it off. Where Otellini saw Web television as the chance for Intel to take the lead in a big consumer business rife with dissatisfaction, Krzanich has focused on reviving PC and mobile business, reportedly concluding the TV project was a costly distraction.

Exactly right. Now to seize Intel’s manufacturing opportunity.

Promotion in the App Store

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Two interesting articles last week, better together.

First came TheInformation’s1 maiden piece about How Apple Gives Some Apps an Edge (subscription required):

Being featured [in the App Store] can be a developer’s jackpot. Developers say that it could cost them between $100,000 and $300,000 in marketing to buy as many downloads as they receive from being highlighted in Apple’s “Editors’ Choice” section of the App Store or listed as a “top app.” Eyeballs in the App Store are particularly valuable because the store reaches users in the mood to find a new app.

But for developers, the connections yield more than promotional buzz. Developers also get key product advice and access to Apple engineers starting long before a product launch.

Apple, in turn, gets a way to shape the multi-billion dollar app market. The company says the system is designed to find and promote great apps. In practice, the criteria for “great” can include not only a well-designed app, but also whether it includes features Apple wants to push. Those might include whether the app runs the latest version of its iOS mobile operating system or whether it is tailored to international users. It also helps if the app is exclusive to Apple’s App Store.

The next day came news that Cut the Rope 2 was launching in two weeks, and that it would be exclusive to iOS. From VentureBeat:

Misha Lyalin, the CEO of Russian mobile developer ZeptoLab, announced the Dec. 19 release date of Cut the Rope 2 at a press event Thursday night.

The sequel to the best-selling physics-based puzzle game will debut exclusively on iOS devices, at a limited time discounted price of 99 cents. This new adventure has franchise mascot Om Nom embarking on a journey to restore his collection of candies, which has been stolen by a mischievous gang of spiders. Lyalin described the game as hard but still definitely accessible to children, particularly through a story with many animated cutscenes and an interactive Om Nom on the main menu.

To be sure, the timing of the articles was pure coincidence, and perhaps the content of the articles was coincidence as well. But I don’t think so. This is smart business on both sides:

  • Apple gets yet another example of a must-have app that is only on iOS. While there is no doubt Cut the Rope 2 will eventually make its way to Android, and probably to Windows Phone and Windows as well, even those launches will simply reinforce the idea that if you care about apps, you ought to buy an iOS device
  • ZeptoLab will certainly get massive app store promotion for their launch, guaranteeing a hit. And, when something is a hit on iOS, then it will likely be a hit on Android whenever it finally comes over

The truth is that paying for apps, as Windows Phone is famous for (but not Windows, at least while I worked there as an app store category manager), is very rare, and for good reason: it results in low quality ports and added support costs for the developer, not to mention terrible PR that reinforces a platform’s weakness. But there remain lots of tools in the app store manager’s chest:

  • App store promotion can be traded for exclusives (or, in the case of a lower profile app store, ports)
  • The withdrawal of promotion can be threatened to retain exclusives. As an app store category manager for Windows in the runup to the launch of Windows 8, I heard this more than once: some marquee developers who were predisposed to support Windows 8 (again, this was pre-launch) ultimately didn’t for fear they would lose favorable treatment from Apple
  • Exclusive or desired ports could be promised favorable treatment in marketing
  • Platform owners could buy paid marketing on an app’s website or other properties. This is more pertinent to content owners, particularly magazines and newspapers, which have lots of paid marketing for sale
  • Apps could be featured in retail stores, or in keynotes and other public events

I have no idea the degree to which Apple (or Google or Microsoft) uses these tools, but I’ve heard various iterations of all of these. The bigger question is where does that leave the small, independent developers?

At a disadvantage, to be honest. App Store promotion, is, as TheInformation details, a bit of a black box that favors large developers.2 And that shouldn’t be a surprise.

The truth is that the app stores are really just that – stores. Your typical grocery store, for example, stocks thousands of items, but the ones with large branded sections or on the ends of aisles aren’t there by accident: there is negotiation and favors traded, and usually money, and the small guys are at a disadvantage. In fact, much more of a disadvantage than those in app stores. At least app stores have unlimited capacity, unlike a grocery store, and algorithmic lists that are outside of human control. Moreover, in my experience, money changing hands isn’t really part of the equation.

This is why, while I have been very critical of Apple’s reticence in enabling sustainable business models, I haven’t really said much about top lists or the structure of the App Store itself. The best means of promoting your app is to do it yourself, and, more importantly, build it with a cost structure that is sustainable.

The vast majority of apps are lifestyle businesses; hoping they’ll be something more – and accepting VC/Angel money to make it so – simply doesn’t make sense. And those with higher aspirations best start valuing marketers just as highly as their engineers.

  1. A quick aside about TheInformation’s business model: I’m actually relatively bullish. TheInformation has only eight employees, a few of whom look to only be part-time. That means costs are low (and the entire venture is bootstrapped), which means TheInformation only needs a few thousand folks to expense a subscription in order to turn a nice profit. There is, in fact, a lesson here that applies to the conclusion of this piece ↩

  2. Microsoft, to its credit, originally refused to play this game at all. The Windows 8 app store was designed to be completely meritocratic; as a category manager I could not guarantee an app would be featured. The idea was this would increase the appeal to said independent developers, placing them on an equal footing with the big guys. Over time, though, this stance softened out of necessity ↩