Two Minutes, Fifty-six Seconds

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After endless dithering, that’s how long it took me to know the iPhone 5C would cost $549.

It was at two minutes, fifty-six seconds1 that Tim Cook said there would be a video – a video! – about the iTunes Festival.

And it was awesome.

In case you didn’t watch the whole video (and you really should – it’s only a couple of minutes), this clip of the ending captures why it matters:

Message: Apple is cool.
Message: Apple is cool.

This was Apple, standing up and saying to all the pundits, to all the analysts, to everyone demanding a low price iPhone:

NO!

No, we will NOT compete on price, we will offer something our competitors can’t match.

No, we are NOT selling a phone, we are selling an experience.

No, we will NOT be cheap, but we will be cool.

No, you in the tech press and on Wall Street do NOT understand Apple, but we believe that normal people love us, love our products, and will continue to buy, start to buy, or aspire to buy.

Oh, and Samsung? Damn straight people line up for us. 20 million for a concert. “It’s like a product launch.”

Apple's iTunes Festival video on the left, Samsung's Galaxy SIII commercial mocking those standing in line on the right
Apple’s iTunes Festival video on the left, Samsung’s Galaxy SIII commercial mocking those standing in line on the right

This attitude and emphasis on higher-order differentiation – the experience of using an iPhone – dominated the entire keynote and the presentation of features, with particularly emphasis throughout on the interplay between software and hardware.

  • Retail Look at our new store with an entire room devoted to service. Paying more for an iPhone is worth it.
  • iOS 7 You get all our new features, right away, for free. Only Apple gives updates immediately. Paying more for an iPhone is worth it.
  • iWork, iPhoto, and iMovie You get amazing software, that’s only available on iOS, with your new iPhone. Paying more for an iPhone is worth it.2
  • iPhone 5C It looks and feels amazing, with a “bespoke” assembly and “solid dense feel you would not expect from a plastic product.” Paying more for an iPhone is worth it.
  • A7 iPhone has the best performance. Paying more for an iPhone is worth it.
  • Infinity Blade Look at this game that is only possible on an iPhone. Paying more for an iPhone is worth it.
  • M7 iPhone fully integrates into every part of your day, and has exclusive apps like Nike+. Paying more for an iPhone is worth it.
  • Camera We don’t focus on stats, we focus on helping you take better pictures through our integration of hardware and software. Paying more for an iPhone is worth it.
  • Touch ID Apple notices and spends time on the tiny annoyances that you didn’t even notice, and does so by integrating hardware and software. And we want to protect your data, not use it. Paying more for an iPhone is worth it.

If you disagree, well, we won’t sell you an iPhone.

I wrote after the WWDC presentation that Tim Cook Was a Great CEO:

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

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

Today’s presentation – which, make no mistake, had Tim Cook written all over it – reminded me of something else: Cook’s incredible sense of self. Cook is his own man, one of the few in the world who could follow in the footsteps of someone like Steve Jobs without losing himself in the shadow. It’s why Jobs picked him.

That assuredness and self-confidence was on full display in this presentation. This was Apple, confidently, and without a glimmer of doubt, declaring that the iPhone is special, that it’s worth paying for, and that people all over the world will do just that.

The strategy, then, is clear. The question remains, of course, as to whether or not it is right.

First off, this will result in more iPhones sold. I posted this chart Sunday in Thinking About iPhone Pricing (which is worth reading3 if you missed it):

A "new" iPhone at the same price points as the "old" iPhones will sell many more units due to higher demand
A “new” iPhone at the same price points as the “old” iPhones will sell many more units due to higher demand

To the general public, the iPhone 5C is not an old iPhone 5. It’s a new iPhone 5C, and the demand will be much greater than it was for last year’s 4s. The price of a new iPhone is now 16% less than it was last year, and demand should rise by at least that much (and I think most pundits are seriously discounting the attractiveness of color). Moreover, it’s no accident that the traditional closing advertisement was focused on the 5C. I expect the vast majority of ads to be the same, and the iPhone 5C to be the best seller in the line. Sure, it’s not $199 (unsubsidized), but it’s also not $649; to pretend nothing has changed is wrong.

Second, I expect Apple to move to a dominant position in the US market. iPhone has been gaining share for several years now, and the iPhone 5C at $99 will only accelerate that. I know the US market is special, but it still matters, particularly to Apple and a great number of app developers.

Third, this solidifies Apple’s hold on the Mercedes-Benz/BMW portion of the Asian market, particularly China. Is it out-of-reach for the vast majority of consumers? Yep. But it will be aspirational, something you put on the table to show others you can afford it. And, to be clear, there are a lot of people that can afford it. Saying stupid things like “the iPhone 5C is equivalent to the average monthly salary in China” belies a fundamental misunderstanding of China, its inequality, and its sheer size specifically, and all of Asia broadly. Moreover, when you consider a Mercedes is tens of thousands of dollars more than a Toyota (and on down the line in luxury goods, for whom Asia generally and China specifically is the largest market by far), $300 more isn’t that much.

Moreover, in China it’s Apple’s brand that is, by far, the biggest allure of the iPhone. Apps are free (piracy is mainstream), larger screens are preferred, and specs and customization move the needle with the mainstream far more than they do in the US. But no one else is Apple. Having a high price preserves that.

It is Asia, though, that is ground zero for potential Android-first development. While the 5C will move more iPhones, it will only very slightly slow Android’s massive market share domination, and it’s possible Apple will never break through in any significant way in markets like India or Indonesia.4 Moreover, the Samsung brand is very strong in Asia, and Korean culture as a whole is increasingly dominant; you can’t escape Korean pop, Korean soap operas are the most popular shows continent-wide, and they both include/endorse Samsung heavily. A combination of must-have Android apps and Samsung chic would be problematic.5

Apple, ultimately, has decided they’re ok with taking that risk.

As I wrote last week, strategy is about making choices, and Apple has decided to not even pretend to pursue market share, but instead embrace their up-market status. As long as they retain their app advantage, this will obviously be a profitable choice.

More importantly, it’s Apple doubling-down on what they are best at. I have railed against Blackberry and Nokia for trying to compete in areas they weren’t great at (OSs), instead of focusing on their strengths. Apple is doing just the opposite. They are avoiding a market share fight, which is ultimately about price and compromise, and are instead focusing on the experience of using their products and the advantages accrued by being fully integrated from the chipset to iTunes.

And that’s why they started with a concert; the iPhone is a brand, an experience, an aspirational lifestyle. Who wouldn’t want to pay just a bit more to be a part of that?

  1. All times are from the official event podcast in iTunes ↩

  2. This is a tried-and-true strategy: iLife moved a LOT of Macs ↩

  3. Of course I think so ↩

  4. They will, however, be in better shape than Google in the aforementioned China no matter what happens; most Android there is Google-less ↩

  5. I don’t really know the European market; I’d suggest Benedict Evans for a better view ↩

Twitter Acquires MoPub

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When Yahoo Acquired Tumblr, I wrote about the Signal-to-Ads Cycle:

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

The result is the signal-to-ads cycle:

  • Information is gathered from first-party sites via analytics, 3rd-party sites via ads, buttons, etc, and owned-and-operated mobile apps tied to your identity (think Instagram)
  • Highly targeted ads are served in search results, display ads, and natively, primarily on PCs

At the time, Yahoo had lots of ads, but almost no signal at all; Twitter had the opposite problem. Great signal, some interesting native advertising, but not many other advertising channels.

Twitter just filled in a big hole.
Twitter just filled in a big hole.

That changed today with the acquisition of MoPub. From TechCrunch:

MoPub, a startup that helps mobile publishers manage their ad inventory, has been acquired by Twitter, giving the social network another route into building its advertising business, specifically on mobile platforms…

MoPub as a business works with a number of publishers to help them maximise sales and performance on their mobile ad inventory. For now, it’s unclear whether a Twitter deal would mean that Twitter would become the exclusive customer, so to speak, of this technology, or whether Twitter would use it as a way of branching out its own social graph on to other sites, and other Twitter clients.

I think it’s very likely MoPub is Twitter’s AdSense:

  • Twitter has a great signal about its users: whom I follow is a great approximation for what I’m interested in. That’s even more valuable than whom I know
  • Twitter is not a great platform for any sort of display advertising; the targeting would have to be much more precise than what is possible with current technology for users to tolerate anything more than promoted tweets

MoPub solves this riddle; Twitter can serve up highly targeted ads everywhere but Twitter proper. It’s a great acquisition.

Thinking about iPhone Pricing

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Before the 5C was well-known, I argued that sticking with just one new iPhone model a year had a dangerous precedent: Ford, and the Model-T:

Still, the idea that Ford became overly focused on production as opposed to customer needs is a worrying one; if this fall brings nothing more than a 5S, with the same form factor as the 5, well, that will be great for production costs, but not so great for customers who prefer a larger phone, or a cheaper one (and remember, Cook is a production guy, not a product one).

It was controversial to suggest Apple might add SKUs – heck, it’s still controversial today – even though the logic is inexorable.

A quick aside about pricing and segmentation

The most elementary thing to understand about pricing is the demand curve. In general, and as one might expect, the quantity sold has an inverse correlation to price.

Basic demand curve; as the price drops, the quantity sold increases
Basic demand curve: as the price drops, the quantity sold increases

The trouble with only selling one product is that you can only hit one spot on the demand curve; you don’t have a product for customers who fall lower on the demand curve (red in the illustration), and you are charging less than you could to those higher on the demand curve (yellow).

A one-product strategy is too expensive for some, and doesn't capture full value from others
A one-product strategy is too expensive for some, and doesn’t capture full value from others

This is why companies typically sell multiple variations of a product; the idea is to also sell a higher-priced product that appeals to those willing to spend more, and a lower-priced product that attracts those lower down the demand curve. Ideally, the lower-priced product doesn’t cannibalize the higher-priced ones.

A well-designed multi-product strategy captures much more value
A well-designed multi-product strategy captures much more value

In this case, a company can capture much more of the value in the market.

Apple’s iPhone Strategy Until Now

Famously, Apple has eschewed segmenting the iPhone’s market. There are lots of reasons this could be the case, but I think the simplest explanation is also the correct one: the iPhone 5 is the first iPhone that Apple believes is “good enough”.

When a product category is brand new, the first few offerings are always deficient. They’re too slow, too big, missing features, compromised, etc. But, this being technology, the improvement is remarkably rapid. Most of this improvement is at the high-end, but soon it is possible to make a mid-range offering, and then a low-end. However, as long as the market is still immature, the leaps in quality year-over-year are significant and, more importantly, perceptible to average customers.

In the case of the iPhone, the 3G was clearly better than the 1st iPhone (enclosure notwithstanding), as was the 3GS relative to the 3G, and the 4 to the 3GS. Ultimately, Apple feels it was the iPhone 5 that is “good enough,” as seen by their willingness to finally make a mid-range version.

If the iPhone 5 is "good enough," then it makes sense to sell a lower-cost version as soon as practical.
If the iPhone 5 is “good enough,” then it makes sense to sell a lower-cost version as soon as practical.

The “good enough” threshold is a dangerous one for the integrated innovator, as that is when modular substitutes start to catch up in the overall experience. While the iPhone retains lots of advantages and strong lock-in, to not offer a second, lower (not low) priced iPhone would be a mistake.

In fact, the primary mistake Apple has made, if they made one, was in determining exactly where the “good enough” line is at. The iPhone 4S is arguably “good enough” and could have been the basis for a mid-range model last year. Apple thought otherwise though; I would imagine a not insignificant factor is that the iPhone 5 is the first iPhone with a fully Apple-designed SoC, the A6.

Regardless, the line has been set; clearly we won’t see a truly low-priced iPhone until Apple can include iPhone 5-level technology at a price they are comfortable with.

So What is the Price?

Given the high bar Apple has set (iPhone 5 technology), I (now1) expect the iPhone 5C’s price to be on the high end of estimates, and possibly higher.

The fact the 5C needs to be sold in both subsidized and unsubsidized markets makes the pricing tricky; in subsidized markets, Apple is currently receiving a subsidy of around $450 on the iPhone 5. It wouldn’t make sense to unilaterally lower that – after all, it’s not like the carriers are going to lower iPhone service bills. This sets a floor of $450 for the unsubsidized 5C ($0 with contract). This also lets Apple dump the 4S, with its 3.5″ screen, 30-pin connector, and lack of LTE.

$0, though, is problematic from a branding perspective. While a new phone, heavily advertised (unlike the old iPhone 4) and sold for $0 would move an incredible number of units, it would also create consumer expectations around $0 and associate Apple with “cheap.” I would imagine Apple is very hesitant to go there. $99 makes more sense. (This point on branding applies to the unsubsidized cost as well; in Asia, in particular, the iPhone’s biggest selling point is brand prestige, not apps or user experience. Apple will be happy to err on the side of more expensive.)

$99, however, implies an unsubsidized cost of $550. While certainly cheaper than the 5S, it’s not clear that $100 delta is worth the additional complexity of an entirely new phone.

In other words, to answer this section’s heading, I’m still not sure. Something has to give, whether it be the subsidy amount, avoiding the brand association with $0, or a too-high price. I’m leaning towards a lower subsidy, meaning a price of $450/$99;2 that may also be why NTT DoCoMo and China Mobile will finally sell the iPhone. Still, I wouldn’t be surprised at $450/$0. (Update: I’m hearing $550/$99 has a good chance, but totally unconfirmed).

How is This Strategy Different?

It is true that Apple has been selling multiple iPhones for a few years now; right now they sell the iPhone 5 for $650/$199, the iPhone 4S for $550/$99, and the iPhone 4 for $450/$0. However, while this does capture some customers further down the demand curve, I think that the overall demand for “old” iPhones is much lower than demand for “new” iPhones.

"Old" iPhones likely have less overall demand than "new" iPhones
“Old” iPhones likely have less overall demand than “new” iPhones

The 5C, on the other hand, will be about as “new” as an iPhone can get, particularly with it’s colorful enclosures. Even if it’s priced the same as an iPhone 4S or 4, it will sell many, many more units because of stronger demand.

A "new" iPhone at the same price points as the "old" iPhones will sell many more units due to higher demand
A “new” iPhone at the same price points as the “old” iPhones will sell many more units due to higher demand

I expect the 5C to be a massive hit, not just internationally, but also in the US and other subsidized markets. This suggests a significant drop is the iPhone average selling price, but a big bump in top line revenue. The margin impact isn’t clear; iPhone 5 internals sold at $450 will likely cause a decent, but not huge, dip.

What about the iPhone 5S?

The 5C clearly targets two iPhone growth opportunities: unsubsidized markets, and price-sensitive customers in subsidized markets. However, there is one other huge opportunity that Apple has always been reticent to target: enterprise.

The implosion of RIM and fragmentation of Android are increasingly leaving the iPhone as the default choice of more and more enterprises, and it’s in this light that the rumored fingerprint sensing technology is particularly interesting.

Most corporate laptops require two-factor identification. Previously, this meant a key card, although most now use the TPM chip with a separate password. Phones have been managed; IT departments can require a strong password, and remotely wipe a device, but there is no way to do 2-factor authorization, even though smartphones are just as much a computer as the laptops used 5 or 10 years ago.

In this light the fingerprint scanner is very useful: a fingerprint + password = 2-factor authentication. I could absolutely see the 5S being the first Apple product to not just infiltrate the enterprise from the ground up, but to be actively encouraged and even required by IT departments.

For this reason, I don’t think the 5C will have the scanner; even Apple will do something to protect their high end.

  1. I previously argued rather stridently that the iPhone 5C ought to be very aggressivly priced, although even then I was struggling with the subsidized versus unsubsidized pricing problem, and quickly changed my mind. I do think that Apple has been slow in moving the iPhone to lower price points, and are suffering for it particularly in Asia. Perhaps I’ve been influenced too much by what I see, but there’s no question there are fewer iPhones relative to Android here in Taiwan than there were two years ago. Still, it really would have been out of character for Apple to be that aggressive; it increasingly seems the iPod, which was always price-competitive, was more of an aberration ↩

  2. In this case, the 4S stays at $0 subsidized. Regardless, in all cases I think the 5 will be discontinued ↩

Shameless Samsung

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Samsung introduced the Galaxy Gear yesterday, and, yeah, it’s not great.

I jumped on the leaked prototype, with the same general sentiment: Samsung’s watch will undoubtedly change drastically whenever Apple’s wearable is released. And, to be certain, we will mock them for copying.

Perhaps we’ll even use a staged picture:

Or maybe just a checklist:

Samsung, to their credit, hasn’t responded; if I ran their Twitter account, I’d be tempted to post this:

Via Benedict Evans. Click the image for the original article.
Via Benedict Evans. Click the image for the original article.

Every pre-iPhone phone maker is irrelevant, if they even exist, except for Samsung, who is thriving. Samsung the copycat was smart enough to realize they needed to change, and quickly, and so they did.

Or maybe it wasn’t being smart. Maybe it was simply not caring what anyone else thought about them, their strategy, or their inspiration. Most successful companies, including Apple, including Google, seem remarkably capable of ignoring the naysayers and simply doing what is right for their company. In the case of smartphones, why wouldn’t you copy the iPhone? Nokia refused and look where that got them!

We, especially in the West, have a powerful sense of justice and fairness when it comes to product features and being first. Business, though, is not fair, even if it is more just than we care to admit.

Notification: You will be discontinued when Apple releases a wearable.
Notification: You will be discontinued when Apple releases a wearable.

Ridiculous? Yes.

Probability of failure? High.

Discontinued after Apple’s launch? Certainly.

Liable to put Samsung out of business? In fact, it’s a symbol of exactly why they succeed.

Another Nokia Explanation; The Same Tragic Conclusion

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While I remain convinced that Microsoft’s Nokia acquisition was largely driven by fear of losing Nokia as an OEM, either to Android or bankruptcy, there is something else curious about the timing.

(The following scenario is conjecture, but not the analysis that follows)

ValueAct, who is opposed to Microsoft’s push into devices, was dissuaded from a proxy fight last Friday (the last day to file their intentions). The price? Steve Ballmer as CEO.

However, they don’t join the board for another month. And so, Ballmer and the board, fully committed to becoming a devices company, pushed through the Nokia acquisition (ValueAct had no idea), locking in the devices and services strategy (and the reorg to a functional organization).

Shades of the old Microsoft, to say the least.

In this version of the story, Stephen Elop is almost certainly the next CEO; this telling presumes that the Nokia discussions proceeded in tandem with the reorg, with the presumption Elop would take over a functional organization in 2018, Ballmer’s original retirement date. Now that will be pulled forward.

That’s the tell, in fact. Will Elop be CEO? If my original theory is true – that Nokia was on the verge of leaving Windows Phone, either for Android or bankruptcy – then Elop simply can’t be a serious candidate.

This version of the story is, of course, much friendlier to Microsoft. It’s always better to be portrayed as being Machiavellian as opposed to being helpless. My conclusions, though, remain the same:

The tragedy in the deal, as I hinted at earlier, is that I think Microsoft ought to abandon Windows Phone. The war is over, and iOS and Android won. It would be far better for Microsoft to focus on serving and co-opting those devices, instead of shooting the most promising parts of their business in the foot for the sake of a platform that is never going to make it.

Let me elaborate on what I mean:

  • The problem for Microsoft in mobile is that Android has completely destroyed the value of a licensed OS; Microsoft’s traditional software model is broken. The only way to make money is to sell hardware to a segment of the market (with lower margin percentages relative to software), or services that sit on top of OSs (with lower prices relative to software).

  • A services model is horizontal; a devices model is vertical

    Devices are vertical, services are horizontal
    Devices are vertical, services are horizontal

    If your strategy is services, like Google, then you seek to serve every platform. If, on the other hand, your strategy is devices, then you seek to differentiate your platform alone

The issue for Microsoft is that a services strategy and a devices strategy are fundamentally opposed to each other. Your services will be forever paying a strategy tax to support your devices, which won’t even be fully differentiated.

You see this happening right now with Office. Microsoft has to date refused to release Office for iPad, presumably to help make Windows 8 a tablet success. On the flip side, there is finally a version of Office for iPhone and Android, which removes a key Windows Phone differentiation. It’s a mess.

If you believe that strategy is about making choices, then it’s clear that “Devices and Services” isn’t a strategy at all.

Yet, it now seems highly likely that this “strategy” will be put into effect, which in practical terms will mean the continued hamstringing of Microsoft’s services to support their push into devices, magnified by the “One Microsoft” reorganization.

And that’s too bad.

Microsoft has some great services up-and-down the stack, and Office 365 in particular is remarkably innovative from a business model standpoint, and a much better product than critics like to admit. Microsoft ought to have their entire weight behind protecting their business turf and winning in the cloud and premium consumer services.

Moreover, it’s a much better fit for whom Microsoft is as a company. They are not “One Microsoft,” and have not been for decades now. Instead they are a company with a bunch of products and divisions who primarily share an insatiable thirst to win everywhere, enemies and friends be damned. They ought to pursue a strategy – services – that entails just that: being everywhere. Unfortunately, they now have $7 billion more reasons and the distraction that comes with them to pursue a strategy that they themselves see as winning only 15% of the market.1

As someone who wants to see Microsoft succeed (or at least not fail), for the sake of my many friends who work there and the Seattle area as much as anything else, it’s disappointing. Alas, it’s not surprising.

  1. Clearly, Microsoft can’t let go of their OS fixation – and this includes Elop. Moreover, I think their Internet Explorer victory in the 90s has fooled them into thinking they have a chance today. The problem is that web pages (theoretically) work anywhere; apps don’t ↩

Podcast: Microsoft’s mobile dilemma

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I joined Rene Ritchie on his Vector Podcast to discuss Microsoft, Nokia, Apple, IBM, Samsung and more.

Literally the minute we hung up, news broke that Microsoft was acquiring Nokia, so we jumped back on for a few more minutes of instant-analysis.

Rene was a great interviewer (even if he let me ramble!), and I hope you enjoy listening.

Links from the show:

The Deal That Makes No Sense

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Early this morning Microsoft acquired Nokia for €3.79 billion (plus €1.65 billion for patents). It is a deal that makes no sense.

While industry observers love to pontificate about mergers and acquisitions, the reality is that most ideas are value-destroying. It is far better to form an alliance or partnership; most of the benefits, none of the costs.

A partnership similar, in fact, to the one formed just two years ago between Microsoft and Nokia.

From Microsoft’s perspective, that was a brilliant deal; Matt Drance characterized it as “Microsoft Buys Nokia for $0B,” and he wasn’t far off. The premier pre-iPhone phone maker, with what was even then one of the best supply chains, distribution networks, and brands in the world would be exclusively devoted to Windows Phone.

There is nothing further to be gained by an acquisition.

Moreover, the fact Steve Ballmer is stepping down makes a deal of this magnitude hugely problematic. Guy English has already characterized Ballmer’s disastrous reorganization as a straitjacket for the next CEO; adding on a mobile phone business that Microsoft probably should abandon is like attaching an anchor to said straitjacket and tossing the patient into the ocean. It will be that much more difficult for the next CEO to look at Windows Phone rationally.

So that brings us to the Nokia perspective. I have argued that Stephen Elop made a massive strategic error by choosing Windows Phone over Android; coming from Microsoft, he failed to appreciate that Nokia’s differentiation lay not in software, but in everything else in the value chain. It would have been to Nokia’s benefit to have everyone running Android, including themselves. Everyone would have the same OS, the same apps, may the best industrial design, distribution, and supply chain win.

Elop threw it all away.

Today no one cares about Nokia’s industrial design, distribution, or supply chain, because their devices lack an app ecosystem, the price of entry into smartphones. Perhaps even now, Nokia was considering going to Android, or maybe even going out of business.

And thus I believe we’ve arrived at the rationale for this deal.

I theorize that Nokia was either going to switch to Android or was on the verge of going bankrupt. (I suspect the latter: part of the deal included €1.5 billion in financing available to Nokia immediately, and the fact Microsoft had to take Asha but not the brand or maps suggests they were trying to keep the price as low as possible). And, had Nokia abandoned Windows Phone, then Windows Phone would be dead.

Windows Phone has already been largely abandoned by other OEMs; Samsung and HTC make warmed-over versions of 6-month old Android hardware, and that’s really about it. Of course that will now stop, Microsoft’s protestations to the contrary, but regardless, without Nokia it would be over.

And so, I would argue that this deal is not unlike the Motorola one, where I believe Google had its hand forced by Motorola’s threat to sue other Android OEM’s for all they were worth.1 Microsoft felt they didn’t have a choice.

The tragedy in the deal, as I hinted at earlier, is that I think Microsoft ought to abandon Windows Phone. The war is over, and iOS and Android won. It would be far better for Microsoft to focus on serving and co-opting those devices, instead of shooting the most promising parts of their business in the foot for the sake of a platform that is never going to make it.

At the very least, it shouldn’t have been Ballmer’s decision to make.

  1. To be clear, that’s the only similarity here ↩

If Apple is Disrupted, Will We Blame Tim Cook?

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I’m not predicting the following will happen, but I’m also not saying it won’t.1

September 18, 2018, Beijing, China – In a development few could have foreseen even five years ago, it’s Beijing and its global icon Xiaomi that is the star of September, the role formerly filled by the increasingly irrelevant Apple.

At 10AM local time (7PM Monday on the West Coast) Xiaomi is expected to announce the Mi 8, the latest version of their free phone that has taken the world by storm. Like its predecessors, the Mi 8 is expected to be gorgeously designed, available online, and priced at $0 without a carrier contract.

$0. You read that correctly, and it’s that price that explains what has happened to Apple.

Xiaomi has focused on creating well-designed yet inexpensive phones from the very beginning; the phone comes with a plethora of Xiaomi services and the ability to fully customize every aspect of the phone. Xiaomi makes money off of the subscription fee users pay for these services, as well as by collecting a percentage of all the transactions that occur on the device, ranging from subway tickets on every rapid transit system in Asia, to designer bags in Shanghai’s most exclusive boutiques.

This focus on services and recurring revenue allows Xiaomi to keep its phone prices as low as possible; Moore’s law and the “good enough” nature of phone hardware made what is possible effectively $0 (Amazon and Google have pursued similar strategies in the tablet space, to the iPad’s detriment).

Apple has struggled to adapt. The company had become accustomed to massive hardware margins, subsidized by carriers. In fact, for the first eight years of the iPhone’s life the top-of-the-line model was priced at $650. Critics, however, point to the introduction of the iPhone 5C as the turning point. Eager to solidify its hold on markets subsidized by carriers, and confident that a slightly lower price would help in countries like China, Apple priced their “low-cost” phone at a still-high-end $450.

That same summer Xiaomi hired Google’s Hugo Barra as its vice president of Xiaomi Global, and Barra quickly attacked Apple’s pricing overstep, grabbing the design-conscious market in not just China but the rest of Asia as well. From then on, Xiaomi simply rode the wave of the fastest-growing region in the world, building a massive war chest that let them break into America’s rapidly growing prepay market.

In the meantime, Apple, stuck with an obsolete business model, has been working steadily on increasing its services offering, an area that has never been a strength for the company. Unfortunately, even if Apple’s services were as attractive as Xiaomi’s offering, it would be exceptionally difficult financially for the company to shift from the $325 it formerly acquired per iPhone buyer to the $50/year that Xiaomi receives.

Many fans hold out hope Apple will return to its former glory, but investors are circling, and the hype machine has long since crossed the Pacific.

Again, this is a fable, but perhaps a useful one; were we to know for certain it would happen (and here, Xiaomi is simply a convenient stand-in for any number of potential challengers), how ought Tim Cook respond?

It’s not like Apple doesn’t know the importance of services; they’ve been investing in what is now iCloud since iTools launched in 2000. They’re just not very good at it; it doesn’t seem to be in their culture to build and iterate the type of product that has failure built in.

Moreover, the time to prepare for that 2018 scenario is now, yet does anyone seriously think Apple should lower the price of the iPhone? There is broad consensus that the 5C would be appropriately priced at $450, in order to maintain Apple’s quality and margins; yet, it’s those very same margins that would make the iPhone uncompetitive with Xiaomi’s M8, were it to exist in the attractive form I describe.

And that’s the dilemma. Were Tim Cook to shift Apple’s business model away from hardware to services, with the vague promise that Apple will make it up in volume by 2018, he would rightly be fired. Immediately. And yet, if he doesn’t, and Apple falls, he’ll be marked a failure just the same.

Of course, there are plenty of reasons to believe that Xiaomi or a similar company will not disrupt Apple in this way. Apple simply has too many devoted users, and there are too many apps. To overreact would be foolish. Better to double-down on your strengths and build the best device possible for a higher price, and besides, your culture would never let you do anything different.

To be disrupted is not to lack vision, or intelligence, or even product sense.2 Rather, it’s to be challenged by a business model that offers good enough products or services at a price you simply cannot afford to match. Were this situation to befall Apple (and again, I am not predicting this by 2018) Tim Cook would not have failed; he would have simply met the fate that all of recorded business history suggests is inevitable. What would be far more surprising would be if he, or his successor, did not, at least eventually.

I mentioned in my recent podcast with Horace Dediu that Apple does a great many things wrong. If they are still iconic in ten years time, then we will know for a fact that it was everyone else who was mistaken.

In 2010, I wrote an academic paper arguing that Apple was particularly well-suited to resisting disruption. Many of the references are dated, but it’s still worth a read: Apple and the Innovator’s Dilemma

  1. Although I don’t think it will, at least in this timeframe. The iPhone is far stronger than its critics realize ↩

  2. To be clear, Steve Ballmer clearly lacked the third, and I would argue the first as well. I find it deeply uncomfortable to be in some small way defending a CEO that I truly think was bad at his job ↩

Motivation and Marx

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On this (US) Labor Day weekend, I’m thinking about motivation, and the role it plays in creating great products that consumers love. It seems patently obvious that products created for love or passion are superior than those created for money or fear, yet the compensation model used in most of business hews much more closely to the latter.

I’m hardly the first to consider motivation and work; the means by which one’s work is valued is a critical part of Marxist theory.1 According to Marx, under capitalism, labor is priced according to the law of value, i.e. the price of labor on the market. This allows the owners of the means of production – factories, and whatnot – to profit off of the surplus value produced by labor.

Socialism, the next step past capitalism, values labor according to its use value; the laborer is paid based on what he produces. Because society owns the means of production, there is no need to profit. Marx predicted socialism, combined with increased technology and automation, would eventually produce a vast surplus that would allow goods to be distributed based on need, rather than merit.

The next stage in Marx’s theory enabled by this surplus is most commonly known as communism. Here, to quote Marx, “labor has become not only a means of life but life’s prime want.” In other words, you do work because you love the work, not because you have to work.

Sounds familiar.

I certainly don’t endorse a communist form of government – history speaks for itself – yet I don’t believe in dictatorships either. However, we have no trouble with the modern corporation being a de facto dictatorship, and we glorify the most dictatorial of CEOs; there are clearly efficiencies to be gained by dictatorships, particularly if the dictator is a visionary.

The difference in our standards, of course, is that the downside of a poor dictator in a corporation is capped at bankruptcy, so we don’t mind the risk; in a state the downside is far more terrible, and our tolerance for dictatorship commensurately lower.

And so, what about pay, or more precisely, what about motivation? What is the best way to ensure creativity and inspired design? A state depends on all types of labor, some less inspiring than others, so a communist society where one’s motivation is solely intrinsic is doomed to failure.

But is that the case with companies, particularly those producing consumer technology? There’s no question the means of production have become rapidly commoditized. Cloud providers like AWS let anyone build at Internet scale, and software is freely available through the open source movement. The same open source movement, in fact, that Bill Gates has famously decried as communism. While Gates meant it as an insult, he was absolutely spot-on: open-source is, if nothing else, people doing work simply for the love of the work.

The same motivation that produces something truly great.

Of course open source doesn’t have the strongest record in design, perhaps because it lacks the dictatorship of a single individual with the taste to create something amazing. The sort of dictatorship, in fact, that exists in the modern corporation, particularly ones that are functionally organized.

Maybe that is the winning formula: a tastemaker setting direction, and those inspired by nothing more than the love of their work doing what they do best.

Or maybe not. One’s mind does wander on a holiday.

  1. If you’re a political theorist, brace yourself; I’m going to simplify ↩

Podcast: Staying Hungry

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I was honored to join Horace Dediu on his new interview podcast, High Density.

We spent a fair bit of time on Microsoft and Steve Ballmer, but also touched on Apple, functional versus divisional organizations, and more. I hope you enjoy it.

Some relevant links from Stratechery:

The John Kay piece I reference is called Sometimes the best that a company can hope for is death. Really great.