Epic vs. App Stores

The ongoing fight between Epic and Apple / Google is one of the biggest tech stories of the year. The situation is very fluid, with a lot of developments since last week, and a ticking time bomb by end of August.

Not surprisingly, there’s been a lot of “takes”, most of which is candidly not too useful, and a small amount that have covered the situation from insightful angles. Instead of regurgitating these insights, I thought I’d just list a few here (most of these are usual suspects if you surf a lot of tech punditry):

The Chinese Android app stores example

I think it’s rather futile to debate the abstract merits of “open” vs “closed,” which at the ideological level is the heart of this fight. Tim Sweeney has been very consistent over the years – his public criticism of UWP is spiritually similar to his stance against Apple / Google, and I believe it’s stemming from not merely a business interest calculation (though he is often accused of such), but a genuine belief in “open.” 1

Instead, I think it’s more useful to discuss the Chinese Android app distribution landscape, as a real example of why Epic’s desired state (open up iOS to 3rd party stores and alternative payments) may not be good for consumers. (The linked Chinese post above is a great read on this, below is my brief summary of the same topic.)

When Google abruptly exited China in 2010 (and along with it, the Google Play store), there was a gold rush to fill in the vacuum left in the Android ecosystem. At a 30,000 ft level, a series of things happened:

  • In the beginning there was a flood of independent stores, with notable ones like Wandoujia (funded by ex-Google China head Kaifu Lee’s Innovation Works) and 91 Assistant.2
  • In a landmark deal at the time, Baidu acquired 91 Wireless (which owned the 91 store) for almost $1.9B in 2013.
  • As of 2013 Tencent also had an Android app store MyApp. After Tencent leveraged WeChat’s popularity to promote MyApp (“if you wanted the latest version of WeChat, go to MyApp”), MyApp gradually became one the most popular stores.
  • In 2014, prominent Chinese Android handset brands (with the exception of Xiaomi) formed a coalition called the “Mobile Hardware Alliance”. A major goal of this coalition was to exert influence in the distribution of games (which was recognized as the key cash-cow in app stores) in the Chinese Android ecosystem.

The current state of stores, at a high level, is this:

  • All the Chinese Android brands have their own stores, and because of the coalition, these stores have significant weight.
  • Tencent MyApp is the biggest non-OEM owned store.
  • The once prominent independent Android stores (without backing of OEM or a major social app like Tencent’s QQ/WeChat) are greatly declined in presence.
  • Collectively there are still dozens of stores.

How about the economics – let’s talk about that 50%?

  • There isn’t a unified rate – everything is negotiated. But indeed, if you are a game publisher not Tencent or Netease, the 50% store cut is the common term you will get.
  • Strictly speaking, this isn’t an “Apple-apple” comparison, as these Chinese Android stores call this “joint operations” of games where in theory they are providing more value-add (funneling more traffic etc.).
  • The prevailing rate for Tencent and Netease have been pushed down to 30%. (And of course Tencent keeps 100% in its own MyApp store.)

To summarize, the Chinese Android app store landscape is very much objectively a worse state than the Apple / Google monopoly Epic is complaining about:

  • Consumers have a confusing user-experience (overwhelming amount of store choices, fraud / security / malware concerns, inconsistent UX of the same app across different stores).
  • Developers are typically giving up a much higher share of revenue.
  • Developers have a lot more development costs / headaches (support dozens of app stores, SDKs, builds).

To be clear, it’s not a certainty that we will see a similar end-state if the Apple / Google “app distribution market” and “payment market” is opened up by regulation. (For one thing, the Hardware Alliance thing is clearly suspect to anti-trust scrutiny.) But it is clearly a possibility with strong factual support.

Problems that Apple should address

Having argued why “the grass isn’t greener” on the other side that Epic desires, let’s briefly talk about issues that Apple should tackle. This part is focused on gaming specifically.

For the 30% rate, I do believe (and clearly I’m biased with a vested interest here…) that this should be pushed lower with how the ecosystem has grown and evolved, even if purely arguing from an economies of scale perspective. Ultimately though, economics are a reflection of “who owns the customer”, so Valve’s model of volume-based tiers (starts at 30%, drops to 20% for sales above $50M) isn’t a bad reference. (This is also the common logic in retailer / wholesaler agreements.)

(Alternatively, Apple can continue to make confidential deals with the biggest partners, offering rev share discounts on a case-by-case basis.)

Apple also should update its strategy (and thus policies) regarding emerging services like cloud gaming. The rejection of Microsoft xCloud on iOS feels short-sighted, and untenable in the long-run if cloud gaming does take off. (It’s also a bit silly that at the same time thousands of HTML5 games are available directly within WeChat, which seems like a much bigger violation; arguably xCloud is offering much better games that would enrich the user-experience of iOS gamers.)

To end on a light-hearted note. Every time I write about Apple and mobile gaming, I will bring up my dream for an Apple-designed controller peripheral. I don’t think that will ever happen, but one can dream…

  1. Conversely, Apple, like Nintendo, like Disney, have been decades-long champions of the “closed” side of the debate. Just for transparency, at at the abstract level I lean closer to this camp, because I idolize seamless user experiences (which are typically easier to realize in a “closed” ecosystem).
  2. As a sign of the times, a popular feature-set back then was a PC client that was a storefront and also a manager for the download and installation to the phone, similar to using iTunes to manage iPhone apps.

Thoughts on WWDC 2019 Keynote (games-specific)

This was all around a very exciting WWDC Keynote, that I feel advances the entire Apple ecosystem in various ways. In this post though, I’ll primarily focus on the relevant parts with impact to the games vertical.

Xbox One and PlayStation 4 controller support

The facts: Apple announced Xbox One and PlayStation 4 controller support across the entire iOS, iPadOS and tvOS family. This was really but a footnote in the whole 2-hour plus proceedings, but there’s a lot of tea-leaves that can be read here.

For one, this seems clearly in service of the Apple Arcade service, and part of a wider games vertical push, coming later this year. For years I’ve lamented that Apple didn’t have a passion for the games business (unlike their passion for music), despite being uniquely positioned to really shake up the landscape. This may be a sign that this year is different, and Apple is making an earnest effort.

This may seem like an obvious thing, but getting over 100m1 hardcore-gamer-approved controllers “for free” is a big deal. It will go a long way in spinning up the virtuous cycle of more developers taking advantage of controller support and more gamers looking for controller-friendly core titles.

It’s also worth pondering whether Microsoft and Sony actively participated in realizing this, or just passively agreed. I’d bet more on the former, given the mobile gravity narrative I’ve discussed some years back.

Project Catalyst

I’m assuming Project Catalyst is what became of Marzipan. In any case, this was the initiative to make porting iOS apps to Mac easier. Today’s section on Project Catalyst was easily one of the keynote’s biggest highlights (only overshadowed by SwiftUI in my opinion).

I don’t think it’s a coincidence that Apple picked a game as one of its 3 testimonials onstage today. MacOS is at the end of the day a 100m install-base platform, and Project Catalyst had made it easier for game studios to consider adding Mac to the list of supported platforms.

Sign in with Apple

This announcement makes a lot of sense given Apple’s privacy-as-a-platform-differentiator value proposition. (The throwaway email generation is in particular a nice touch.) By making it mandatory to any app that offers a 3rd party login, Apple has also introduced a lot of uncertainty to developers who want to own their users’ account identity.

This is more aimed at ad-tech and Facebook / Google, to be clear, but it could be pretty messy for game publishers who leverage them for sign-on and virality. For cross-platform games it also introduces more potential account / social fragmentation, if players are offered several choices (e.g. Facebook / Xbox Live / Apple) to create an account with. Certainly the account creation flow just got more complicated for UX designers.

Ingredients for post-platform

The 3 bits above can all factor into the post-platform narrative. It just got much easier to envision a console-like experience with an Apple Arcade game, where a player is sitting in front of an iPad with a PlayStation controller.2 In this world there’s also no reason why the iPad can’t become the most popular platform to play Fortnite (given it’s predominantly a console game), and the iPad offers a degree of mobility not existent with PlayStations.

Of course, we still need to see what Apple actually delivers later this year, and it’s a cliché to say that it all depends on the content (it does).

General keynote thoughts, beyond games

Some general thoughts, for those curious:

  • SwiftUI was the star of the keynote. Even as someone who has not professionally coded at all, this was super cool, and makes me tempted to pick up a Swift programming book
  • The Mac Pro and Pro Display’s pricing is all about re-establishing the high-end of Apple’s line-up, especially as the iPad and MacBook’s use cases become blurry (did you see iPads now have mouse support?)
  • The Pro Stand with a $999 price tag was a bizarre marketing move, to say the least. Do you have to purchase either the $199 VESA mount adapter or the Pro Stand? (Looks like you do.)
  • The Minecraft AR demo – for now this remains “cool demo” and not very practical. It also seems like just laying the foundation for an eventual hardware (Apple glasses?) announce
  • I’m waiting for the next Apple Watch hardware refresh to get a replacement. I recently traded in my original series Apple Watch for a paltry $27
  1. Xbox One + PS4 sell-in is around 130M; actuals for total number of controllers might be quite a bit more, given that gamers may have multiple controllers per console for local multiplayer.
  2. I’m being a bit deliberate in choosing the iPad in this example, given there are roughly 500m iPads in use which is far bigger than the install base of AppleTVs, and using console controllers with iPhones may be considered silly by portions of the western audience given the screen size.

The Waiting Game

Reuters had an interesting article yesterday over NTT DoCoMo – Apple negotiations over the iPhone. While reports of tense negotiations between Apple and carriers are nothing new (China Mobile pops up in the news every few months about its tough stance to Apple), I thought there were a couple of juicy bits worth pondering on from the DoCoMo article.

First, one of the sticking points of the discussion is apparently DoCoMo’s dilemma over its range of value-added-services (VAS). This is not surprising. DoCoMo was revolutionary back in the day with i-mode, which was a textbook example of a successful carrier strategy in mobile internet (so much so that a MBA case is one of the first results in a google search on i-mode). What DoCoMo was able to market with i-mode (and get people to adopt) was often considered far ahead of its time, so much so that when the iPhone first launched, quite a few people used Japan to point out that the iPhone is not “revolutionary” (see this counternotions blog referencing this).

What’s interesting to me here is one walled garden (DoCoMo’s VAS) being disrupted by another walled garden (Apple’s iPhone). The point is not that Apple is more open (it certainly is, at the App Store layer), and therefore it is winning (a big part of the iPhone’s appeal is its app ecosystem); the point is how Apple is leveraging “open-ness” at one layer to succeed with a “closed” business model. Furthermore, it certainly isn’t surprising how DoCoMo is trying to leverage Android (a far more open OS than iOS) to defend its extremely closed business model; unfortunately Japanese consumers don’t seem that engaged.

As an aside, I don’t want to use this as proof that carriers can never get services right – I don’t believe in such business inevitability (similar to how I don’t believe in “Open>Closed”). But there’s a host of organizational challenges (carriers are not known more fast moving and disrupting themselves), which is why most commentators would say “it’s not in their DNA”. I do understand the carriers’ perpetual fear of becoming just a “dumb pipe” – by definition of which they will be undifferentiated, which drives profitability down – so I think some of them will just keep trying, and a few may succeed with a deeply vertically integrated model.

Second, the Reuters article had this paragraph which I couldn’t resist commenting on:

DoCoMo’s requirement that its company logo be imprinted on all its devices also conflicts with style-conscious Apple’s insistence that its products be left as manufactured.

I would argue that this has nothing (well, almost nothing) to do with style and everything to do with brand and market power. The point is not that adding carrier logos would make the iPhone ugly; the point is this is a symbolic fight over who owns the customer – as in, did the customer buy the iPhone because of DoCoMo or because of Apple, and which brand does the customer have more affinity towards? As a reminder, a couple of years ago, Verizon had the exact same argument with Apple, and this was the result.

Some final thoughts: in this big waiting game, I think it’s a lose-lose game for the hold-out carriers (DoCoMo / China Mobile) and Apple, with clear value left on the table; however, the alternative scenario is not necessarily a win-win but quite possibly a win-lose, which is why the parties seem happy to play it out.  DoCoMo is happy to bleed customers if it thinks it can extract more value from preserving its VAS with its remaining customers; and Apple does not want to budge on handset subsidies and other points (it seems happy to pay the opportunity cost in market share for unit profitability). China Mobile seems to be an even bigger hold-out (and thinks it will have a better hand the longer it waits), as recent news indicates.

Apple: all news is bad news

Apple’s stock has taken a rather spectacular dive the past 6 months. It’s almost halved in value, and market sentiment is continually abysmal on the stock. To me it has reached the stage where all news is bad news.

I’m not a proficient trader, so I won’t comment on whether it’s the right time to buy Apple. I only want to discuss the fundamentals, and why this current stock price makes little sense in the long term.

Apple is currently trading at a P/E ratio of below 9. Bears of the stock will say this is justified because they expect Apple’s future earnings to collapse – that’s where the fundamentals come in. I think I’ve observed Apple for quite some time and I’m generally up to speed on the mobile industry trends. My opinion is that little has changed in the market outlook for Apple between now and 6 months ago (when Apple stock reached all-time highs).

Think about these pieces of info:

  • Apple’s market share in the US has stabilized, if not straight up outgrowing Android
  • In the world’s biggest growth market, China, Apple has demonstrated tremendous growth and may have become one of the largest foreign companies in China (by revenue) in the short span of a few years
  • Out of all the PC manufacturers facing the momentous decline of PC sales, Apple is the best positioned as it is the company disrupting the industry in the first place with its tablets. Yet Dell enjoys a higher PE ratio than Apple (and yes, the buy-out talks buffed Dell’s price, but the argument is still valid)
  • Most data show that Apple still completely dominates in the tablet space (in contrast, Android tablets don’t seem to be selling), and the ecosystem is thriving – Supercell, a mobile gaming company that only has two iOS games published and is only focused on designing for iPads, is on a run-rate to generate $800MM in sales in 2013. Apple’s ecosystem is a king-maker; have we seen any case studies of remotely close feats from competing eco-systems?

Apple’s stock is a weird beast. When Jobs was alive, the price was continually under-priced with fears about what his health means to the company. After his passing it had a good rally in mid 2012, but even then at its peak it wasn’t that expensive (think about Amazon’s stock, at any given point in time). Nowadays bears routinely claim that Apple is dead, has stopped innovating, and that the management is dumb (“Tim Cook should resign!”). I struggle to find any evidence supporting these claims.

Perhaps people like nothing better than for the world’s most successful, yet obviously most contrarian (it has perhaps the smallest number of SKUs for any company of its size; it insisted on vertical integration when everyone said vertical integration was dead) tech company to stumble into irrelevance, so that conventional wisdom prevails once again (“Apple is repeating its mistakes of the PC platform wars!”) and Apple is nothing but a one-time anomaly that can be conveniently forgotten. I have a feeling that Apple will live longer than they expect.

App Store “10x” download speed boost in China

A bit of news that has got minimal English coverage in the past couple of days: Apple seems to have rolled out a CDN update for their App Store in China, with folks talking about as much as a “10x” download speed increase for end-users.

This is the type of unsexy but critical infrastructure work that at the end of the day will make a big difference for the user experience, and therefore, a company’s top line (and bottom line). I tried updating some apps while in China a few weeks ago – it was painful to say the least. Hopefully this dramatically changes things. And this is also the kind of stuff local entrepreneurs in emerging markets need to agonize over – how do you make do with poor infrastructure, be it broadband penetration, availability of credit cards (and other payment methods), or just poor end-device computing power (cheap PCs).

I think this story is interesting for potentially another angle – I’ve always wondered how much of the iPhone sales in China are driven by luxury goods buyers, the type that are usually late tech adopters. I’ve noticed anecdotally that many owners of early version iPhones in China were the well-to-do who used it as a status symbol – I doubt these folks likely explore the App Store that much. On the other end of the scale, there was and has always been a active scene of sideloaders, and I suspect iPhone jailbreak rates are much, much higher in China. These two opposite groups of users both have little use for the official App Store – and that could be why they’ve put up with slow App Store speeds for so long.

How the West was Won (or, another round of “open” vs. “closed”)

John Gruber posted a critique of a Tim Wu piece in The New Yorker. The ideas in the Gruber post are nothing new, but it’s interesting to see this topic come up time and time again.

Wu’s basic argument is “open beats closed,” with the modifier that “closed can beat open, but you have to be a genius.” Unsurprisingly, he enlists Wintel and Google as supporting evidence for why open beats closed.

Gruber specifically disagrees with Wu’s logic for why Windows defeated Mac in the original PC platform wars of the 80s-90s. In Gruber’s view, Windows won not because it was more open, but because Mac innovation had stalled, allowing Windows to catch up. He uses Mac’s brief period of allowing 3rd party licensing as evidence that being more open did not help Apple grow the Mac business; quite the contrary, after Jobs came back and closed off Mac licensing, Apple begun its resurgence.

Over at Techcrunch, Michael Arrington chimes in by stating that the Internet was the unmentioned factor that leveled the playing field for Macs – because the Internet became the core application, it mattered less that Macs had far fewer compatible software.

To me, the question to ask is (and has always been) why did Wintel win in the 80s/90s, and why was the Mac able to stage a come-back in the 2000s. Open vs. closed is simply a popular variation on this core question, because it has been twisted by folks such as Wu to be the critical success factor. It is not.

Wintel was immensely successful due to its leverage of network effects – i.e. the utility of the product grew as more people used it. Microsoft Word is powerful because everyone uses it, and the .doc format is near ubiquitous; if only one person used Microsoft Word, it wouldn’t be that useful outside of creating documents to print.

Wintel was also a two-sided network made up of both hardware/software vendors on one side and consumers on the other. This further reinforced the network effects on the consumer side.

The fact that Wintel chose to be “open” at the hardware layer (can be installed on any IBM-compatible PC) certainly helped drive adoption, but does not itself create network effects. The simple counter-argument is iOS – iOS is certainly “closed” at the hardware layer (exclusive to Apple’s products), but that does not prevent iOS users enjoy the network effects of iOS-exclusive apps (such as Instagram, which for a long time was iOS-only; another example is iMessage, which will probably always be exclusive to iOS).

Pre-Internet, the core application of computers were productivity applications such as Office, and Microsoft Office was (and Lotus 123 etc., before Office) exclusive to Wintel. In a sense, it is a bit of a chicken and egg problem – Wintel’s “openness” to hardware vendors drove OS market share, which in turn amplified network effects of the most popular applications on this platform, which in turn lead to more OS market share. It was a great, virtuous cycle.

It’s hard to say what choices Jobs would have made had he stayed at Apple in the late 80s; it’s a convenient side argument that Apple lost the 80s/90s platform wars due to poor business leadership, however I find this side argument to be often distracting.

Moving on to the late 90s, Arrington is correct in stating that the Internet leveled the playing field. Specifically, as the Internet became the core application, it removed the network effects exclusive to Wintel thanks to Office and other Windows-exclusive software. (Jobs’ successful negotiation to get Microsoft to develop Office for Mac is also Apple’s attempt at leveling the playing field.) And ever since then, network effects have had diminishing influence on PC platform wars – this is the underlying reason why Macs could stage a come-back from low single-digit market share; the beautiful execution (consistently excellent hardware/software iterations) also certainly helped.

As a corollary of this observation (diminishing network effects due to the Internet being the ultimate cross-platform application), we can predict that in the mobile platform wars, despite the seemingly dominant positions of Android and iOS, it is certainly possible for a late-comer (such as the new Firefox OS, and/or other new entrants) to enter the market and capture significant value. However, the success or not of those mobile OSes will not be determined by whether they are “open” or “closed” – by that measure, we can certainly already declare Firefox OS as the winner. The next few years in mobile will be very interesting.

The Legacy of Steve Jobs

Like most people interested in technology and business, I picked up a copy of the Steve Jobs biography by Walter Isaacson. It is a good book and will mostly satisfy any outsiders’ curiosity at the man’s life, his idiosyncrasies (there were many), his faults and fallacies, and his achievements. What I want to talk about here is his legacy.

He was not a perfect person

FIrst off, and just to clear the discussion, Steve Jobs was clearly not a perfect person. He had many issues. He was a jerk a lot of the time, to a lot of people. He liberally took credit for other people’s ideas. If you hated him before, the book will not change your opinion of the man.

But he also had many strengths. He was a natural marketer and negotiator. He was diligent, and learnt through his failures to be a great manager. And of course he was a visionary, in the truest sense of the word. This discussion, however, is not about how much I admire him (or not), but what I took away as key lessons from his endeavors.

“Open” and “Closed” are both valid choices

One of the most straightforward take-aways from Jobs’ work in the past 10 years is that vertical integration remains a valid business model. Tech fans like to frame this debate as “Open” versus “Closed”, and associate all kinds of philosophical and ideological meaning with it; and clearly Jobs himself had some ideological bias towards “Closed”, but at the end of the day, they are both perfectly valid business choices.

As my favorite business school professor likes to say, no company is 100% “open”, nor is any company 100% “closed”. “Open” and “closed” are a set of strategic trade-offs, just like any strategic decision is. For Apple, “opening” up their platform, such as allowing other hardware vendors to make Mac clones (or iOS clones), clearly has major pros as well as cons. The question is does the trade-off fit with the broader set of strategic choices the company has made – in Apple’s case, “opening” its software platforms clearly contradicts with its vertical integration strategy, and causes it more harm than benefits.

Even Apple itself provides a great example of why sometimes it might make sense to go the other direction. Jobs strongly resisted porting iTunes to the Windows platform. His argument was that by bundling iPods with Macs via the iTunes software, he could lead to additional sales of Macs. This argument had some merit, but it also was clearly inhibiting the growth of iPods as an individual product category. In the end, Jobs was smart enough to be pragmatic and allow his team to develop iTunes for Windows – “hell froze over,” as he would say.

This pragmatism, and the realization of “open” and “closed” as trade-offs (rather than which is better in an absolute sense), is extremely important, as an organization would otherwise be limiting its own strategic direction. For example, we should not be at all surprised if after the Google-Motorola deal is complete that Android becomes a much more “closed” offering.

The (revised) 80/20 rule – the 20% that makes a product “insanely great” takes 80% of the time[1]

One of my main revelations from the biography was just how hard it was to get something perfect. For example, it was a ridiculous amount of work for Steve Jobs to get the music labels onboard with selling their music on the iTunes store, and this had little direct relationship with the sales of iPod hardware. But Jobs believed, correctly, that making the entire user experience with mp3s as painless as possible would reap great rewards in the long run.

It was certainly eye-opening to me to see how difficult it can be sometimes to make progress on the smallest things. To execute against a simple strategy, such as “get publishers to launch their books and magazines on the iPad,” it took Jobs and his senior team countless pitches and meetings.

As most companies don’t spend the 80% of work it takes to get that last 20% right, they often look at what Apple has been pulling off and see magic while showing disbelief. That was the industry’s reaction when Jobs pulled off the music label deals for iTunes. That was the industry’s reaction when he announced the iPhone. And clearly, almost two years after the iPad was announced, competitors are still “flummoxed” in terms of a response.

Focus is key

A corollary of the previous point is that focus is critical. (Larry Page should take the advice that Steve Jobs offered him very seriously – focus on five products.) From a management theory perspective, this is nothing new, but few organizations are as relentless as Apple is at its execution.

Apple’s entire product portfolio can be laid out on one table. It is only because of this, that Apple’s senior management can have enough time to make each one of those products great as opposed to good.

On the flip side, the inability to focus is also why incumbents give startups opportunities to establish a foothold in the market. For example, from a pure strategy perspective, there are few reasons why Facebook cannot completely own the mobile check-in space (Foursquare), or the daily deal space (Groupon), or any of the other hot social trends. Or, in the case of Google, why they cannot completely shut out Kayak, Yelp, or any other vertical search providers. Yet both Facebook and Google clearly haven’t been able to do so. Leaving aside many other factors, the 80/20 rule above is one major explanation.

If Facebook focused exclusively on check-ins, or if Google focused exclusively on one or two search verticals, there would be little that these hot startups can leverage to compete. But focus is hard because it means saying no to incremental growth opportunities and leaving money on the table. And when a company feels it is invincible it is hard to say no. It took Steve Jobs ten years in the “wilderness” and Apple 90 days from bankruptcy to realize how valuable having a focus is.

The organization is his greatest legacy

The last revelation I had from reading the book is still to be proven, but it could be the most profound. During Jobs’ second stint at Apple, he had a clear vision that went beyond building great products and making Apple the best technology company globally; he wanted to build a lasting organization.

Ironically, one of the biggest criticisms that people have for Apple is that it is a one-man show. And over the years investors have continually undervalued the stock because of this. Steve Jobs certainly didn’t help himself in this regard, due to his inclination to take credit (as the book showed, Jony Ive was at times deeply unhappy about not getting enough credit). But consequentially this may also make it all the more magical when people realize what a lasting organization he has built.

What is magical about Apple is not its products. Its products are the output of a process, and it is that process (and the organization which embodies it) that is magical.

Wait, critics of Apple say, just wait until it has a flop – Apple is so hit-driven that all it takes is one flop. Interestingly, people said the exact same of that other Steve Jobs creation – Pixar. Pixar has defied all conventional wisdom in the film-making industry, by making hit after hit after hit after hit[2]. Pixar’s process of creating its products has already become textbook material.

Apple’s process is just as powerful. It is a process that defies conventional business thinking (“open” trumps “closed”?); it is a process that combines a passion for perfection with a relentless focus; and it is a process that goes beyond the influence of any individual[3].

Obviously, the jury is still out on this one, but I have plenty of confidence that Apple will continue to surprise and delight us, for many years to come. This will be the biggest test of Jobs, and it will be by far his biggest legacy.

[1] Indeed, this is perhaps the counter-definition of 80/20, as many companies would make it a strategy to be content with achieving 80% greatness with 20% work, in the name of efficiency.

[2] Granted, Cars 2 looks uninspired, but I will not pass more judgment as I haven’t seen it or the original Cars

What if Apple launched a TV?

First off, a hat tip to the Apple Finance Board, which if you don’t know already, is home to the best Apple analysts, people whose forecasts routinely beat Wall Street “professional” analysts. A thread on that forum inspired me to think about this topic over the past few days.

The original topic, simply put, is what’s next for Apple? What’s the next product category for Apple that can generate >$10bn revenue a year (like the iPad will easily do this year)? Many people would suggest TVs as a potential category. The living room is at the heart of the digital convergence, and many vendors from different product categories are vying for control of the “smart living room” – TV manufacturers (Sony’s Google TV, Vizio’s Internet TV etc.), cable operators (their set top boxes), game console makers, Internet streaming device vendors (Roku, Boxee, Apple TV), and the niche HTPC makers etc.

Google made big waves last year with Google TV, however their high-profile efforts quickly hit a wall. Of all the current offerings, I think Microsoft is best positioned with its Xbox 360 + Kinect. The Xbox360 already supports many of the features that Google TV boosts, such as Netflix, Facebook and Twitter (the latter two not necessarily that useful, but Netflix is a killer app), and furthermore it has an entrenched install base. The value-add of another box, which offers some overlapping features, is not strong; and from a user experience perspective, adds more complexity for the consumer – another device to hook up to the TV, more cables to sort out etc.

Under such competitive dynamics, it is arguable that to make a big play in the living room, the TV itself is the most strategically valuable product to launch. The TV is the center piece of the living room and the only piece that cannot be displaced (VHS recorders came and left, DVD players came and will leave soon etc.). It is usually the first remote you reach for and the first device you turn on (although in the US it has been hijacked by the cable set top box). The TV offers a strategic point of control on the whole living room – to access your console, your DVD player or your cable, you need the TV remote. Launching a successful smart TV gains you control of the entire living room, and make all other devices your servant.

Strategy-talk aside, what should the features / benefits be for this “real” Apple TV?

  • At the minimum, it should be an iOS-powered device and supports apps. This gives the product great extensibility in terms of function, and killer apps such as Netflix / Youtube should be available (or even preloaded) at launch.
  • In terms of hardware,
    • Built in DVD / Bluray drive, opening on the side (just like the iMac)
    • If feasible, built in cable tuner so consumers can throw away their set top boxes – this is both about strategic control and simplifying the user experience (getting rid of the cable remote)
    • Large storage to record programs / store apps, photos etc.
    • Wi-fi connectivity
    • lots of USB / HDMI slots for connectivity to other devices
    • Optional components could be card readers etc. (similar to iMacs)
    • And obviously a large shiny LCD…
  • In terms of UI,
    • It should support great customization in terms of managing screen real estate. Users should be able to have multiple apps and channels open in a wide range of display setups
    • It can have some simple remote, but users should be able to control it via whatever iOS or Mac device (similar to how you can control you comcast cable using the iPad)
  • In terms of fancy / advanced features,
    • TV streaming to other iOS / Mac devices – iOS / Mac devices can open a “TV” app and use the device just like a regular TV screen
    • Interaction among iOS/Mac devices – you can send whatever app you’re displaying on your iPad onto the TV, and vice versa. This leads to interesting use cases like taking whatever channel / show you’re watching on the TV onto your iPad, and carrying your iPad into the kitchen or other rooms and keep watching
  • Gaming, which may be where the real value add is (disrupt the console business)
    • TV also functions as a capable iOS gaming device (have to evaluate the costs associated)
    • Again, interesting interaction use cases with other iOS devices – use your iPhone / iPod Touch / iPad as the controller; when playing multiplayer games, say Scrabble, the TV serves as the common display while each player sees player specific info (in this case, their letters) on their smaller iOS screen

Obviously I have not evaluated feasibility (would it be prohibitively expensive? How much software development is needed?), but I’d say the above features are not too far-fetched. The really big question, or missing piece, is if and how this TV disrupts the current content value chain (that’s where Google TV stumbled). Figuring out the content piece is the key to unlocking value; the product I listed here is not disruptive in this regard.

I would love to hear any thoughts and feedback.

Why predictions of the iPhone’s death (at the hands of Android) are greatly exaggerated

The comparison of the growth rates of the iPhone and Android phones is continually a topic of hot debate, in no small part propelled by the highly vocal and emotional fans of both camps. It almost seems conventional wisdom that iPhone vs. Android will be Mac vs. Windows, Part II.

Personally, I believe that on so many layers, this topic is really a non-topic. It provides entertainment value, no doubt, in the form of daily tech soap opera (bloggers jumping on every new data point released and typically extrapolating it beyond meaningfulness to arrive at flame-bait headlines). But from an industry analysis point of view, or a company analysis point of view (scrutinizing Apple / Google), the market share comparisons are really just one data point – it’s meaningful, but certainly not to the degree that the blogosphere claims it to be. Apple’s future is not in jeopardy if iPhone loses pole position to Android.

Over at Wired, Fred Vogelstein takes a crack at this topic. His main point is that if you sum up all the iOS devices (iPhone, iPod Touch, iPad), they are still outselling Android, by as much as 42%. While this may be encouraging to the Apple camp, there is no reason we can expect this to hold, especially when other Android powered devices (e.g. Android tablets) eventually hit the market.

I don’t have any doubt that Android devices will outsell iOS devices. If it hasn’t happened already, it will happen soon. There is no reason to believe an OS from a premium manufacturer (Apple) with an extremely limited range of SKUs can outsell, on a pure volume basis, an OS that is free to use and which is backed by some of the biggest consumer electronics companies in the world. On a dollar value basis, it might be a different story, but still not that likely. On a dollars of profit generated basis though, highly possible (Apple generates more profit than rest of mobile industry combined, with only 3% unit volume share).

That said, the main reason people are obsessed with these market share numbers seem to be the underlying assumption that iPhone and its eco-system will lose its draw to developers, and by extension to consumers, if it is relegated to a minority market share. I think there are at least a couple of counter-arguments to make here.

First of all, being the minority market share platform does not translate into a lack of quality apps, to the extent that it will hamper mass-premium consumers’ (Apple’s core segment) interest in the platform. For example, if you flip the argument over the number of apps in the Android vs. iPhone app stores on its head, you may well say that even though Android has a smaller number of apps, the eco-system is already sizable enough, so that for any functionality there will be “an app for that”. Another example would be none other than Macs – what’s the market share that Mac OS holds in all personal computers? Single digits? Do mainstream Mac users complain about the lack of quality apps (note the emphasis on mainstream – specific categories like hardcore gaming is lacking on the Mac, but even that is seeing improvement)? Holding these two examples, I would argue that with the developer community Apple has already amassed, it would be hard to foresee a drastic dying out of quality apps, even if Android floods the market.

Secondly, if you take a step back and look at the broader trend in computing, it is definitely headed in the direction of platform-agnostic. Some tech purists would even decry the whole notion of apps – everything should be realized on the browser, over the web. If you look at the desktop space, there is indeed the trend of “fat” clients (local apps) losing out to “thin” clients. Indeed, Google is perhaps one of the biggest proponents of this – its whole challenge to Microsoft is based on the browser. If we believe that the same trend will apply to mobile devices, then the apps craze we are experiencing really is just a transition phase – at some point, most of the apps you want would be delivered to you on the browser, as opposed to an app you download (again, Google’s Gmail mobile version on the browser is arguably better than Apple’s Mail app). And let’s give credit where credit is due – when Apple launched the iPhone in 2007, Steve Jobs’ initial vision was to have web apps (browser-based apps) instead of local apps. The app SDK and the app store only came out a year later, due to popular demand. (So you could say that Jobs had already envisioned an end-game where the browser was the point of delivery for apps, not the app store – his vision was perhaps just ahead of its time.)

If you sum these two arguments together, the bigger point is that iPhone will not lose its richness of apps in the face of Android capturing majority market share – it’s big enough already of a market so that there will be quality apps developed, and apps will be platform-agnostic anyway down the road. As long as Apple continue to bring innovation to its devices, it should not be overly worried about losing market share leadership – its whole strategy is founded on premium products, which implies that it won’t be market leader from a revenue / volume perspective. That’s why I wrote the headline of this post.

PS: Also, for people who continually say this will be a rerun of Apple vs. Windows in the 80s, please pause for a moment and reflect on the Mac’s continual resurgence over the last decade. This is again very indicative of the broader trend. In other words, one could almost claim that the “network effects” so famously championed by Wintel is close to becoming irrelevant, because the Internet has leveled the playing field for the small market share OSes.

PS2: And even if we are to talk of the platform wars of the 80s, we should get the facts straight. The following is my reply on a Quora question (similar topic really) awhile back:

First of all, it’s not really windows vs. mac, but PC vs. Mac. I would say by the time windows 3.0 came out, the platform war between PCs and Macs (at least the first war, not including Mac’s resurgence in recent years) was already over.

If you look at this article on Ars Technica, http://arstechnica.com/old/conte…
as early as 1986 PCs already had over 50% market share of computers, and it over-took the mac platform’s shares a few years before that. So in that sense, there never was a windows:mac war, at least not until very recently.

I think one key distinction between the platform wars of the 80s and android:iPhone is that in the 80s it was primarily driven by b2b, not b2c. IBM was late to the personal computers space, but they were the driving force behind making personal computers legitimate for business – they could go to a sales pitch with a business client with a perhaps inferior product but still sell it, and they could generate serious developer interest in developing for the PC. The killer apps of the 80s were spreadsheets and word-processors, sold to businesses. Apple could have better versions of such products on macs, but they couldn’t sell to businesses as quickly as IBM and clones like Compaq could, which is dictated by company structure and channel strategy – they are positioned as a consumer products company, and the only verticals where they made serious progress were education and publishing (where their products were clearly far far superior). That’s where the network effect kicked in and made Macs a niche.

Flash forward 25 years, and smartphone adoption is primarily driven by consumers, not businesses (blackberries being the exception). This is in Apple’s core area of expertise. It will still be challenging to fend off a group of competitors’ collective efforts (Samsung, HTC etc.), but as long as Apple retain a significant portion of the market, it will be in good shape. Apple doesn’t need to be market leader to be hugely profitable and have a sizable eco-system of 3rd party apps etc. – just look at macs today, as a general consumer you have majority of the apps you need to be happy with it (games being one major exception, which is also therefore a good business opportunity).

So back to your original question, I’d say Android:iPhone will play out very differently compared to Windows:Mac. Android might still end up with a more market share, but iPhone will have enough share and a big enough eco-system so that Apple won’t have to go through the kind of existential challenge it had back in the mid 90s.

The complexities of the Android eco-system, and its implications

Google’s Android OS for mobile handsets is arguably Apple’s strongest competitor in the marketplace. The most recent numbers from Google are 160k activations daily, which implies a run-rate much bigger than iPhone’s recent quarter of 8.4 MM units.

There is no doubt that Android has been a success, especially in terms of offering consumers more choices. US consumers now have a perhaps overwhelming number of smartphones to choose from, across the major carriers. This is certainly a great development.

What I want to focus on in this post, however, is looking at Android from the eco-system players’ perspective – Google, the handset manufacturers, the carriers, and the app developers. My position is that while Android is full of promise as a platform, some fundamental dynamics of the eco-system will make it very challenging to navigate, especially in terms of financial gains – at the end of the day, these players are in it to profit.

I would like to start by going through each player’s objectives from participating in the Android eco-system. Starting with Google, its objectives are:

  • Gain a permanent foothold in mobile, ensuring Google’s future when the web becomes increasingly mobile-driven
  • strategically, prevent dependence on Apple in mobile, limit its bargaining power
  • Increase traffic to Google properties, most notably search, which will in turn grow Google’s ad revenue
  • Offer users a consistent Google user experience across mobile devices
  • “Lock” users into Gmail, Google Maps, Youtube etc. (think Microsoft shipping IE with Windows)
  • Develop a mobile go-to-market channel for future Google products

In essence, it’s all about Android being the hook which will retain the user in using Google products.

What about the handset manufacturers’ objectives?

  • Develop handsets that rival the iPhone’s value proposition, capture market share in the booming smartphone segment
  • Differentiate from competitors
  • Reduce OS R&D costs

And the carriers:

  • Retain some degree of control in the device, unlike Apple’s terms with AT&T
  • Prevent becoming “dumb pipes, up-sell users on carrier VAS (value-added services) such as mobile video, ring-tones, gaming etc.
  • Reduce Apple’s bargaining power
  • Differentiate from other carriers

There is one thing all players agree on – counter the iPhone; but beyond that, there are some immediate points of tension. As smartphones seem to converge on the single big touch-screen form factor, hardware manufacturers will find it increasingly difficult to differentiate in shape and design. In that sense, HTC / Motorola / Samsung would very much want to tweak the UI or customize the OS, but that would quickly run into conflict with Google’s wish to offer users a consistent experience; and practically speaking, UI may really be too much a core part of the OS for the manufacturers to customize. Hence, manufacturers face the dreaded prospect of following the footsteps of PC manufacturers – low differentiation leads to low profits.

At the same time, carriers and Google’s interests aren’t that well-aligned, either. Google recently shuttered its Nexus One online store, which was hailed to disrupt the status quo of handset distribution by offering a contract free model instead of the typical carrier-subsidized model. Obviously this did not please its carrier partners. On the flip side, carriers perennial fear of becoming “dumb pipes” drove them to loading up Android phones with hard-to-remove bloatware, which consumers generally dislike and probably is making Google cringe – and just serves as more ammo for Apple’s value proposition of a refined experience.

My point here is that the logical implication of these interlocking conflicts is compromise. Google aggressively wants Android to become the de facto mobile OS – so much so that not only is the OS free to manufacturers, Google is also reportedly sharing search revenue with carriers / manufacturers. (Pretty amazing that you can think of this as almost the opposite of Apple’s original iPhone terms, where Apple got a share of AT&T’s revenue.) Manufacturers will get away with deals such as putting a Baidu search box on the phone, which would obviously go against Google’s interests. Carriers will get to keep their finger in the OS.

Sometimes these compromises result in degraded user experience, such as bloatware. Most often, they call into question the financial returns on Android. It would be a very difficult task to model how much incremental revenue Google will generate by owning Android, as opposed to not owning an OS and just receiving mobile search traffic from all devices. Manufacturers will get to ride the smartphone boom for a while, but then will again be hard-pressed for innovation – again, the PC manufacturers come into mind. The biggest winner from all this seems to be the carriers – especially Verizon – they finally have options other than Apple, and they can keep their old business model.