Thoughts on Neflix’s Q1 2015 earnings

I’m kicking off the Q1 2015 earnings season (past earnings posts here) with a post on Netflix, just as I did last quarter. I’ll also be doing an updated deck for subscribers to the Jackdaw Research Quarterly Decks service. Having done a pretty broad run-down last time around, I’m going to focus on three things this time around:

  • Subscriber growth, especially in the domestic streaming business
  • Profitability of the US streaming business
  • Profitability of the other two businesses.

Subscriber growth in the US becomes ever more cyclical

As I said last time around, subscriber growth in the US is likely to slow down over time as the service reaches later adopters and much of the lower-hanging fruit is already harvested. However, Netflix had a really good quarter for net additions in Q1, and year on year additions were flattish compared to last quarter rather than down dramatically too:

Quarterly net addsYear on year sub growthSo what happened? Was I wrong about the long-term trend? Actually, no. What’s happening is that Netflix’s domestic subscriber growth in particular is becoming increasingly cyclical, driven heavily by new series launches in Q1 and lower in every other quarter. This is easier to see in this quarterly chart showing just US streaming subscriber growth:

Cyclical US streaming sub growthAs you can see, Q1 2014 was higher than Q1 2013, which in turn was higher than Q1 2012, so there was year on year growth in Q1 every year, emphasizing the increasing importance of this quarter to Netflix’s business. You’ll note that back in 2012 Q4 and Q1 were very similar. Conversely, later quarters in the year have been sagging somewhat: though Q1 2014 was the highest ever for growth, Q2 and Q3 were only second highest, and Q4 was third. Even as Q1 becomes ever better for subscriber growth, the other quarters are showing all the effects of the long-term slowdown. Interestingly, 2015, shown in red, was lower than Q1 2014 and is forecast by Netflix to be the lowest-growth year in four years in Q2. One big question is whether Netflix’s significant slate of Originals planned for later this year can help to change this trend – it’s clearly not expecting that it will in Q2.

US streaming profitability continues to rise

I remarked last time about the fact that Netflix is unique in that it has a public margin target for the year 2020, and the reason it’s able to do so is in large part that there are some very predictable upward trends in the domestic business (Q1 was unexpectedly better than Netflix expected because of higher subscriber adds and lower content costs):

US streaming contribution marginThat’s a really nice straight line, with only a couple of blips in it, and one big reason it looks like that is that another line is going steadily downwards. That’s the cost of those revenues – mostly in content and to a lesser extent streaming infrastructure:

Annual CoR per US streaming subSince this cost keeps trending downwards, Netflix’s domestic streaming gross margin keeps going up. But one of the biggest secondary costs is marketing, which has actually been going up a bit, especially when you look at it on a per-net-add basis:

Marketing costs per subAs you can see, this was the second successive quarter when Netflix’s annualized cost per net addition has risen. As I said last quarter, when growth is slowing, it costs more to acquire each new subscriber. Interestingly, though, Netflix signaled in its shareholder letter a shift in its marketing spend starting in Q2:

In addition, starting in Q2 we intend to shift some of our US marketing budget to international to take advantage of the substantial available growth opportunities. This, in the short term, drives down international contribution profits and drives up US contribution profits.

In other words, despite the fact that it has to work harder to acquire new subs in the US, it’s actually going to dial back spending there in favor of the rest of the world. As you can see from that chart above, it’s actually cheaper to acquire new subs there anyway, which makes sense given the much earlier stage in the market, offset slightly by the lack of familiarity with Netflix. All this will actually accelerate the positive margin trend in the US, but it may impact growth if Netflix doesn’t bring some of the marketing spend back by Q4 this year and especially Q1 next year, which as we’ve already seen are the two big quarters domestically.

US DVD and International streaming profitability

The US DVD business continues to be a wonderful example of a cash cow, throwing off great margins even as Netflix spends literally no money marketing it, simply by harvesting existing subscribers who spend an average of over $10 per month. In some ways, though, an interesting way to look at the US DVD business is that it’s essentially funding Netflix’s international expansion. Below are revenues and then contribution profit for these two segments:

US DVD and Intl streaming revenueUS DVD and Intl streaming contribution profitAs you can see, the international expansion took a while to begin to offset the decline in revenues from the domestic DVD business, but now more than makes up for it, helping to drive overall growth beyond domestic growth alone. However, the DVD business returns the favor when it comes to contribution profit, where the domestic DVD business more than offsets the losses from the international streaming business (the red line in the chart above shows the net contribution profit from these two businesses combined). It’s been a bit tight recently, but that line has never dipped below zero. In other words, the domestic DVD business is phenomenal not only in its own right, but especially because it allows Netflix to expand internationally without dragging down overall profitability, and essentially allowing much of that steadily increasing profitability in the domestic streaming business to flow through to the bottom line.

 

Contrasting iOS and Android adoption patterns

I’ve done two previous posts (here and here) on Google’s Android developer dashboard stats, and I was surprised to find it’s been just over a year since my last one. I may still do a deeper dive revisiting some of the points from those previous posts, but this time around I wanted to do something different – contrast Android and iOS adoption patterns. Google has published data on Android version adoption for quite some time now, but Apple’s only been doing it for the last couple of years, so we have less data. But we still have enough from both platforms that we can draw some interesting conclusions.

iOS adoption – huge initial ramp plus slow conversion

The pattern for iOS adoption is very clear – a massive initial ramp in adoption in the first few days and weeks, followed by a steady conversion over time. The chart below shows the share of the base on each version in the first 24 months from launch:

iOS adoptionAs you can see, by the time the first month is over, more than 50% of the base is already on the new version, and it ramps to around 90-95% by a year later, just before the next version launches. At that point, it immediately drops to 25-30% as the new version takes over, and slowly dwindles from there down to under 10% after two years. There are differences in adoption rates for the various versions shown – as has been reported, iOS 8 has seen a slower initial adoption rate than iOS 7, though it’s now over 75%. Correspondingly, the share of iOS 7 has fallen slightly more slowly than iOS 6 did, though the gap in both cases has closed a bit recently.

Android adoption – an 18-month slog to significant adoption

By contrast, Android gets off to a much slower start, due to the multi-stage cycle of version releases, work by OEMs, carrier approvals and so on. A similar chart for four recent Android versions is shown in the chart below (I’ve grouped point releases into their dessert flavors, as it were):

Android adoption

iOS hits 50% adoption within the first month, but Android can take over a year to hit 50%, and of the three longer-running versions shown here, only one ever got over 50%. The other interesting thing is that Android versions tend not to peak or hit majority adoption until after a new version has been released. KitKat, for example, just barely became the most used version of Android this month, about six months after Lollipop launched.

Here’s a chart that shows peak adoption rates for three flavors of iOS and Android (bear in mind that iOS 8 is likely about 5 months from its peak, which will occur just before iOS 9 lands in September, and that KitKat also hasn’t peaked yet, but I’m estimating that it will do so shortly at around 43%):
Peak iOS and Android adoption

Developer strategies

Now, the reason Apple and Google post this data is to assist developers in deciding which versions of the respective operating systems to target. So what conclusions can we draw from all this as to the best strategies for developers of iOS and Android apps?

Supporting a single version

This strategy wouldn’t serve most developers on either platform very well – it would work better on iOS, where the majority is consistently on a single version of the OS, but even there much of the base would be inaccessible. On Android, this strategy would be disastrous, as single versions rarely get above 50%:

Share of top versionCertainly, the strategy would be more effective on iOS than on Android, because share is consistently significantly higher, but this seems a poor strategy on both platforms. If we make a slight change and now focus on supporting the latest version, things get even worse for Android:

Share of most recent versionThis strategy is obviously completely unworkable for Android, because the most recent version rarely gets above 25% before a new version is released. And supporting a single version, but an older one, is also impractical, since the most attractive users will often be those who upgrade earliest in the cycle.

Support two versions

On iOS, supporting two versions would be an entirely realistic strategy, since the top two versions tend to command an overwhelming share of the base. On Android, too, this would make a big difference, but once again, not as well as on iOS:

Top two versionsTargeting the top two versions of Android captures around 75% or more of the base pretty consistently, but on iOS it captures over 90% of the base and later in the cycle close to 100% of it. Again, though, on Android targeting the top two versions typically doesn’t mean targeting the two most recent versions. That strategy wouldn’t work nearly as well:Share of two most recent versionsFor iOS developers, however, supporting the two most recent versions is an entirely workable strategy.

Other strategies for Android

The biggest challenge with Android is not just the sheer number of versions that command significant share, but that the newest versions take quite so long to achieve meaningful share. As such, developers who invest in supporting the newest version right away may not see much return on that investment for months at best. However, again, those early upgraders may well be among the most attractive customers because they’re likely committed to the platform and eager to try new things. Leaving them out becauseof their small size probably isn’t the best strategy either. Ultimately, if Android developers want to target 75% or more of the base, they have to support more than two versions, and often four, especially if they want to target new versions immediately. Supporting the last three years’ versions is one way to consistently target 75% or more of the base. But bear in mind, too, that we’ve clustered point releases together in all this analysis: in reality, there are three different versions of Jelly Bean (4.1-4.3) and there are already two versions of Lollipop (5.0 and 5.1), all of which would be included if you were aiming to support the last three year’s releases today.

iOS First still makes a lot of sense

There’s simply no getting around it: developing for Android requires support for significantly more versions, on top of all the other complications like many different screen resolutions and sizes. And we haven’t even discussed the return on investment from targeting a single user or percentage point share of Android versus doing the same on iOS, another area where Android becomes less attractive to develop for. Is it any wonder, then, that major apps (including recent examples Meerkat and Periscope) still target iOS first?

What to look for in the Apple Watch reviews

With the Apple Watch becoming available for pre-order on Friday, it’s likely that we’ll see reviews of the device from a handful of people who’ve been given early access to the Watch at some point this week. I am not among them, but I wanted to share what I’m looking out for in these reviews when they do land, and which I think will make a big difference in how the Watch sells.

Notifications

I wrote a piece about Apple Watch and notifications a few weeks ago, and I think how the Watch handles notifications is critical, both because I think it’s an essential part of Apple’s position around intimate computing, but also because other smartwatches have handled notifications so badly. There are two ways to solve this notification problem:

  • Pass fewer notifications to the wrist – i.e., allow users to filter those notifications they want to receive on their Watch compared with their phone, either by app or ideally even more granularly
  • Deal with notifications better – allow users to manage these notifications more effectively when they do arrive. For example, notifications might arrive more discreetly, the user can dismiss them more easily, and/or the user can act on them effectively on the device. There are early indications that the Watch checks at least two of these boxes.

Battery life

I was tempted to put this first, because I think battery life on the Watch could put a huge damper on the success of the device if it’s not adequate. Given the reports we saw earlier this year, and Apple’s own public statements at the recent event about battery life, it’s still somewhat up in the air whether the broader group of users who now have their hands on the device will find it adequate. It’s clear it won’t last more than a single day for most users, but the question is whether it can effectively get through a whole day, especially for users with lots of notifications and other usage on the device. Related to all this is the experience of having to remove the Watch for charging nightly – does this end up being annoying, or is it something the user quickly gets used to?

Complexity / richness

These are two sides of the same coin. Following the Spring Forward event, a number of reporters worried that the Apple Watch was overly complex. That wasn’t my own experience, but I do think that the Apple Watch does far more at inception than the iPhone did, because it’s launching into a very different world. That could come across in two ways, however: as complexity, or simply as a rich experience. Complexity would manifest itself in user confusion, frustration, a sense of not being able to get things done. Richness would manifest itself in a sense of ease of use paired with a sense that there’s more to be discovered – in other words, the basic experiences work well and intuitively, but there’s more to the device than just those. It’s a tricky balance to strike, and so I’ll be looking out for how the early reviewers evaluate the Watch’s performance on this axis. The how-to videos on Apple’s Watch site suggest that there is a learning curve, but none of the interactions there look overly complex.

New interaction models

Closely tied to that, but also broader, is the introduction of new interaction models, both between the user and the Watch and between users wearing the Watch. The Digital Crown, Force Touch, and Digital Touch are all new on the Watch, and they need to work really well for users to embrace them and for interaction with the Watch to be both pleasant and engaging. But Force Touch is particularly interesting because it’s the only one of these three that’s likely to have applicability beyond the Watch. The new MacBook has a new touchpad which uses a similar concept and haptic feedback to simulate a click, which I found amazingly convincing. But there are also rumors (including new ones today) about future iPhones incorporating similar technology. If Force Touch works well on the Watch, it could be critical to future interactions on the iPhone and iPad as well, so it’s important that it works well.

Third-party Apps

It seems like every time I update my iPhone apps recently there’s a new update for an app that I use which adds Apple Watch compatibility. That’s a good sign, and suggests that there should be a pretty robust group of third-party apps available for the Watch both while reviews are happening and especially at launch. But it’s impossible for me to judge whether any of these apps are any good, and whether they add significantly to the experience I already enjoy with these apps on my phone. I’m curious to see whether there are enough of these apps, and whether they’re good enough to really give reviewers a sense of how much value they’ll add to the Watch. I think third-party apps will be a big part of what makes the Watch compelling, just as they have been for the iPhone and iPad, and so this is another key thing to look out for.

When the novelty wears off

The hardest thing for reviewers to gauge will likely be one of the most important factors in its ultimate success or failure – whether the Watch is compelling enough as an addition to the iPhone that its appeal lasts beyond the initial period when the novelty wears off. I don’t know how long reviewers will have had the Watch by the time they do their reviews, but it may well not be long enough to draw a conclusion on this. The Watch, like the iPad, lacks a single compelling selling point. Rather, I think each user will have to discover their own reasons why wearing one makes sense. I believe that the Watch’s success in the first year will depend heavily on the experience early adopters have with it, and how they communicate about this experience with their friends and family. If they find it compelling, they’ll be able to articulate the value proposition far better (and more convincingly) than any Apple ad or store associate could. And that will be key to Apple’s ability to go beyond the early adopters into the mainstream base of iPhone users.

Quick Thoughts: Periscope and Meerkat

I’ve been meaning to write something about Meerkat for a while, but haven’t got around to it. Now that competing product Periscope has launched, I feel like it’s finally time. A brief primer for those to whom these names mean nothing: Meerkat launched several weeks ago, and is a barebones personal video broadcasting app for iOS, and Periscope is a very similar but more polished app which Twitter acquired a while back and launched yesterday.

Watch me talk about this stuff

I did a quick interview with Reuters TV yesterday on the topic of these two apps, and you can see that here.

Also yesterday, by way of testing Periscope, I did a quick Periscope session where I talked about the two, which I subsequently uploaded to YouTube:

Meerkat’s faster start helped rather than hurt Periscope

Given that people knew about Periscope even before it launched, there has always been discussion about how the two would compete and whether Meerkat would have such a lead by the time it launched that Periscope would be dead in the water. I was always skeptical about that – being first doesn’t always (not even mostly) lead to winning in these battles. and first-day results from Periscope seemed to bear that out. Dan Frommer of Quartz posted this chart this morning:

This shows the number of Meerkat and Periscope-related tweets over the last few weeks. As you can see, it took Meerkat most of that time to reach the 30k per day mark, but Periscope almost hit that number in its first day. What I’ve wondered about, and what now seems to be happening, is that Meerkat actually did Twitter and Periscope a huge favor by teaching people about the concept and letting them experiment with it, such that by the time Periscope came along people immediately understood the value proposition.

I prefer Periscope so far

On top of that, as I alluded to in my first paragraph and in the video above, I find Periscope to be much more polished and easier to use than Meerkat. Meerkat seems very much like a cheap Android app, somewhat ugly in its interface and hard to navigate around. Periscope seems much more better thought out, nicely designed and professional, much more at home on iOS (the only platform both apps are on, for now). And of course then there’s the fact that Meerkat got cut off from Twitter’s social graph shortly after launch, which will make it harder for Meerkat to sign up new users, because the process of finding followers will be much harder. For power Twitter users, custom curation of following and follower lists has always been important, but for mainstream users easy setup is key, and Meerkat has likely lost some of that.

Periscope isn’t perfect – the fact that I had to post the video of my session from my camera roll to YouTube rather than being able to share it directly from the app is something I hope they’ll fix in time. Both apps force you to use a portrait orientation, which is fine for selfie-style videos but poorly suited to either group shots or shooting a scene (and, as this BBC citizen journalist expert mentioned, poor for incorporating into professional news broadcasts too). But I like the fact that it keeps sessions in the app for viewing after they’ve ended, unlike Meerkat, although finding those needs to get easier.

It’s still early days here, but I think Periscope has a fantastic chance to dominate, given its polish, its ownership, and the fact that Meerkat laid the groundwork for it. Meerkat isn’t necessarily doomed, but there’s little in my mind to recommend it over Periscope, and I think the latter will pretty quickly become dominant.

Why did these products break through now?

The other question worth thinking about is why these two apps suddenly appeared at this time, and what’s made them so successful when other previous efforts have failed. I think it comes down to two main things, and a third factor which has helped too:

  • Mobile-first products – these products don’t really exist in any meaningful sense on the web or desktop – they’re mobile-first, and only enable streaming from iPhones. Meerkat allows sessions to be viewed from the web, while Periscope doesn’t, but they’re clearly designed for both broadcasting and viewing on the device you have with you all the time. This also allows them to tap into notifications, which are huge for real-time services.
  • Twitter as megaphone – speaking of real-time, Twitter has become the real-time platform, with many people keeping it open and watching the tweets roll in more or less as they happen. It’s already been the real-time platform for covering current events, but that has largely meant text and the occasional picture. Video adds a whole new dimension to this real-time element, and Twitter becomes the megaphone through which these broadcasts from apps get shared with the world. Tapping into existing Twitter audiences and leveraging the retweet as a way to seamlessly rebroadcast popular streams is a huge part of why these services are successful. It’s also the biggest reason Twitter’s acquisition of Periscope makes sense – it adds another vital dimension to Twitter’s “media” strategy.
  • Tech reporters getting on board – this was arguably less a catalyst than an accelerant, but quite a few tech reporters quickly jumped on board with Meerkat, tried it out, broadcast themselves and got the product through its awkward “here’s me eating my lunch” phase that all sharing platforms seem to have to go through. Though that phase was repeated as Periscope launched as regular people tried it out, that early reporter experimentation meant we quickly learned what worked and what didn’t, and this early experimentation by those with significant followings helped the product to get far more attention than it would have got through more of a grassroots adoption by regular people.

Breaking into the mainstream is the next challenge

The challenge will be transitioning from this early success among those who have significant followings on Twitter to regular people. Are ordinary people whose Twitter audiences consist mostly of people they know in real life going to use either of these two services? Or will their broadcasts only be meaningful when they happen to find themselves in the right place at the right time, as with yesterday’s building collapse and fire in Manhattan? I suspect that over time we’ll see some new Meerkat and Periscope celebrities emerge, just as we’ve seen Instagram and Vine give rise to new personalities with significant followings seemingly out of nowhere. But I think that, most of the users will be viewing, not streaming, and that actually fits great with Twitter’s new direction.

Facebook’s payments trojan horse

Facebook’s announcement of person-to-person payments through Facebook Messenger last week has a lot of people scratching their heads. The most puzzling part? It’s not charging for these payments, even though there’s a cost to Facebook, which means it’ll lose money on every transaction. So why would Facebook do this, and what implications does it have for payments and other services at Facebook?

Take a step back for a minute and look at Apple. For years, signing up for an iTunes account was almost impossible unless you were willing to provide credit card details for potential music purchases. As such, Apple collected credit card information for hundreds of millions of users, which enabled the later introduction of purchases of other forms of content such as TV shows, books and movies, and much later enabled the easy introduction of Apple Pay. Having a payment method on file makes creating new paid-for services much easier and more seamless, but getting the credit card information for the first time is the big hurdle. Just look at Google – it’s struggled for years to get users to pay for apps and content. There are certainly other reasons for this, but one of the key reasons is the fact that users don’t provide credit card information when they sign up for either a Google account or an Android device. In markets where Google has added carrier billing as a payment option, app purchases rise significantly, according to one of the companies I’ve spoken to which provides the underlying technology.

So, back to Facebook. Other than its fairly limited previous payments play with partners such as Zynga, Facebook has never really given users a reason to add payment information to their accounts. And that’s been fine, because Facebook’s main business model has been advertising, with payments and other fees dwindling as a source of revenue. But as Facebook attempts for a second time to create a platform for developers and businesses, payment information will be a critical element of many of the potential implementations. The biggest barrier? Most of Facebook’s users don’t have payment information on file. How, then, to incentivize these users to add their credit card details? I suspect fee-free person-to-person payments may well be the trojan horse Facebook is using to catalyze users into adding their payment details to their accounts. Give users a compelling reason to add their details, and then you’ve got them for other purposes too. Now all it requires is getting their permission to use the same credit card for other transactions.

So, what transactions could we be talking about here? Well, last year Facebook trialled some basic commerce solutions, such as a Buy button, and at last year’s F8 conference it announced Autofill with Facebook, in partnership with several other payment providers. But at today’s F8 event we got a much better sense of what it has planned. The Buy button together with Facebook’s Messenger platform announcement highlight various ways in which Facebook could benefit from having users’ credit card details on file. If that platform is to make money, in fact, it’s almost certain that it’ll need some way to allow users to make payments for various products and services, of which Facebook would naturally take a cut. But even beyond the platform announcement, Facebook is planning to bring more video and news content into Facebook natively, and having ways for users to pay for such content on a subscription basis would also be attractive, just as Apple allows its users to do today. In fact, almost all of the ways in which Facebook could diversify away from advertising require it to have ways for users to pay for things through Facebook, and that requires getting their payment details.

All of this brings us back to Google, which we touched on briefly earlier. Google clearly plans to get into the payments business itself with Android Pay over the coming months, and it would obviously love to increase users’ spend on apps and content as well over time. But Google has struggled throughout its history to get users to pay for things, especially since it’s taught them so effectively that its most useful services will be free, supported by advertising. What will Google’s vehicle be for getting users to add their payment details to their profiles? It could arguably take a leaf out of Facebook’s book here – find a way to incentivize users to add their credit cards to their accounts through a service that’s compelling in its own right. Once that’s done, all kinds of new opportunities will open up.

Quick thoughts: Defragmenting media on Facebook

Facebook seems to be working on two fronts to bring content from third party sites natively into the Facebook experience. This began with video, where Facebook has been quietly bringing both major traditional brands and smaller content creators into the core Facebook experience. But there are now reports that Facebook plans to do the same with news articles from major publications like the New York Times, Buzzfeed, and National Geographic.

I’ve talked previously about the video efforts, and in that piece I said this:

Facebook has become a massive destination for video, but almost all the video is actually hosted on other platforms. That obviously has cost advantages for Facebook, but it means that it doesn’t own the content, and therefore can’t monetize it effectively. It also means that engagement around videos on Facebook is fragmented, with popular YouTube videos attracting millions of comments scattered across hundreds of thousands of different user shares of the same video.

There are lots of aspects to all this, and Facebook is no doubt talking up the performance and monetization benefits of publications hosting their content directly on Facebook. But I think one of the other key benefits is the ability to overcome this fragmentation, and that applies just as much to news as it does to video. So let me expand on that a bit. The problem as things work today is that there’s no single version of either a video or an article on Facebook, just the original on the third party site. Meanwhile, there could be thousands of individual shares of that video or article on Facebook, with no connection between them. On the third party site there might be an indication of the number of third party shares, but the site has no easy way to digest what’s happening on each of those shares, and Facebook users have no visibility into how many shares, comments or other metrics the article or video is capturing in total across Facebook. Sometimes Facebook takes an article shared my multiple friends and bundles it into a single card with a single link, but there are still two entirely separate discussions happening among two separate groups of friends.

What Facebook could do if these things were being shared natively through Facebook is start to aggregate all this activity much more effectively, both for the content owners and for users, with commenting, stats tracking and so on happening much more effectively. And of course Facebook could share much more data about the users sharing the content with the content owners, so that they’d get a much better picture of who’s viewing the content. One of the key challenges with Facebook (in contrast to Twitter) is that sharing is inherently private, which provides almost zero visibility for content owners. With native sharing on Facebook, that could change, though of course it raises some interesting privacy implications. If you’re commenting on my video or article on Facebook, does that mean I now get to see your comments, even if they’re only shared with your friends and not public?  And in a world where many news sites have either switched off comments or left them on but failed to curate them effectively, could Facebook help to provide a better class of discussion?

There are so many aspects to all this, including some significant risks for the brands involved. But it seems to me that they would at least in part be making the following tradeoff: ceding control over hosting and branding the content itself in favor of better visibility and tracking of the engagement with that content. For some of them, at least, I’m guessing that’s a tradeoff worth making.

Apple Watch and the Platonic ideal

Malcolm Gladwell and Spaghetti Sauce

I’ve been thinking recently about the sheer range of Apple Watch options, and the departure this represents from Apple’s past product strategy of a single SKU at launch for a new product. As I did so, I was reminded of several TED talks I’ve watched over the years on the subject of choices, and I went back and re-watched some of them. One in particular that seems very relevant to this topic is Malcolm Gladwell’s 2004 talk, Choice, happiness and spaghetti sauce. I’ve embedded it below in case you want to watch the whole thing – there’s also a transcript on the TED site in case you’d prefer to read the thing. I’m a Gladwell fan, generally speaking, but I know not everyone is. However, this talk is a good example of his ability to tell a good story around an ostensibly uninteresting topic, and in the process draw out some key messages.

This talk, if you haven’t seen it before, focuses on the work of a man named Howard Moskowitz, a psychophysicist (don’t know what that is? Neither does Gladwell). Moskowitz’s chief contribution to the world, as Gladwell sees it, was the invention of a concept called horizontal segmentation as applied to the food industry. The key idea here can be summed up by saying that he brought variety to product lines that had hitherto only featured a single product. The mistake, Moskowitz and Gladwell argue, that the food industry had made was to assume that there was a “Platonic dish” – a sort of ideal version of every food product that would be universally accepted as the best possible version of that thing. In reality, of course, people have different tastes, and one person’s ideal is another person’s nightmare, so you need several versions of your product to appeal to different segments. Hence the mention of spaghetti sauce in the title of the talk: Moskowitz was the one who convinced the owners of the Prego brand to diversify their offering, and specifically to introduce an extra chunky version, which became a huge success.

36 flavors of Ragu, 38 flavors of Apple Watch?

So how does all this relate to the Apple Watch? Well, what struck me as I thought about all this is that Apple has very much taken the Platonic ideal approach to its most important device, the iPhone. For seven years, there was only a single new model each year, which you might argue represented Apple’s conception of the ideal phone at that point in time. Next year, that ideal would have moved on a little, but there was still only one. A year and a half ago, Apple introduced the iPhone 5C as an alternative, but really this was just a revamped version of the previous year’s phone, and this past year Apple introduced a different spin, with two roughly equally capable phones in different sizes. Though it’s diversified a tiny bit, it’s largely stuck with the Platonic ideal approach to phones.

But now we come to watches, and the Apple Watch. One way of looking at this is that Apple has not just one Platonic ideal of a watch, but many different versions. In fact, there are 38 versions listed on Apple’s Watch gallery page, which coincidentally is quite similar to the 36 versions of Ragu Gladwell cites in his talk.  This reflects the fact that, when you move from a purely technology product to a an accessory or piece of jewelry, personal taste becomes much more important. As such, the horizontal segmentation approach comes into play, and you suddenly get an explosion of options to meet people’s different tastes and preferences (as well as body size and income).

However, I think the right way to look at all this is that there’s still just one Platonic ideal when it comes to the Watch – in terms of its functionality. The $17,000 Edition contains exactly the same technology as the $349 Sport, and it’s really just the outward appearance that’s different. In that sense, the Watch is a lot more like the iPhone than it is like the MacBook line, where there is a real difference in functionality/capability between the new MacBook, say, and the various flavors of MacBook Air and Pro. Of course, with the iPhone there are also color variations and so on to suit personal tastes, but the basic form factor remains unchanged, so no-one talks about three different “versions” of the iPhone in the same way that they’re talking about 38 versions of the Watch.

Everyone else treats devices like food

Despite the fact that Apple has largely stuck with the Platonic ideal approach for its devices, others have a different strategy. Samsung might well be the Ragu of the devices world, with many different variants designed to appeal to various market segments. Or perhaps a better analogy is the spaghetti rather than the sauce, being thrown against the wall to see whether it sticks. Apple’s approach is focused, but also limiting – I’ve often said that Apple is characterized by the limits it puts around its own addressable market. However, there are significant downsides to the opposite approach too, and not just in terms of the financial cost of a lack of scale around a single product. Another TED talk on choice comes from Sheena Iyengar, and it talks about the difficulty of making choices when presented with a myriad of options:

Interestingly, part of her talk focuses on strategies for making a plethora of choices less overwhelming, among which are categorization and concretization: i.e. divide a large number of options into broad categories, and make the category names (and therefore the differences between them) meaningful. Take a look at Apple’s 38 options and you quickly see that they’ve done both: three broad categories, with names that mean something: Watch as the broad middle category, Sport as a low-end option that could be worn while exercising, and Edition using a common descriptor associated with luxury goods. So even where Apple does offer lots of choice, it’s clear that it understands the psychological impact and has optimized for minimizing the negative impact while helping consumers to choose what’s right for them.

The challenges ahead for Apple’s TV service

The Wall Street Journal is reporting that Apple is finally beginning to get somewhere with its TV service, and has several key content providers on board. Techpinions readers won’t be surprised by any of this, because I’ve been talking up this strategy for some time now, starting a year ago in March 2014 and most recently this past week following the HBO Now announcement. At this point, the outcome I pointed to in that first piece seems more likely than ever, but it’s still not certain that it’ll be a success. As such, I wanted to talk about some of the details of the power struggle that remains ahead for Apple (and for other would-be providers of new pay-TV services) which I haven’t said much about previously.

From lots of little games of chicken to one huge one

What’s ahead is really a huge game of chicken, with the players being Apple (and other would-be new pay TV providers), the major existing pay-TV providers (and especially the major cable operators), and the content owners, both broadcasters and cable networks. There’s already a power struggle between the content owners and the pay TV providers over the fees the latter pay the former, due to two major evolutions:

  • the shift from must-carry to retransmission consent models for local broadcasters, which means they’re now insisting that would-be carriers pay them for carriage
  • the steady increase in affiliate fees for both some individual channels and for ever-expanding packages of channels from some of the major content owners, driven in particular by the rising cost of sports rights and additional sports channels, but also by the increasing investment in original content.

We’ve seen one carriage dispute after another in recent years, with several short-term blackouts, some smaller cable operators dropping Viacom or other content providers entirely from their lineups, and most recently Verizon dropping the Weather Channel, which had hitherto been the most widely-available cable channel in the US. These carriage disputes represent smaller games of chicken, with both sides calling the other’s bluff, and waging public battles for the minds of end users. In most cases, the pay TV providers have ended up caving to some extent and ponying up the required money to keep channels on air, but it’s no longer a sure thing. The relationship between these two sets of players has become increasingly tense, but with these traditional pay TV providers the only channel to market for cable networks in particular, and realistically the main route to market for broadcast channels too, there’s been little alternative but to reach terms and move forward. But many of the content owners would love a real alternative to the traditional hegemony of major cable and satellite providers. The two major telecoms companies, AT&T and Verizon, have provided some competition, but operate very much on the same basis as the old guard.

Incentives to deal, but also penalties for stepping out

All this gives the content owners huge incentives to find alternative routes to market, both as insurance against future carriage disputes and as leverage over the pay TV providers. Few of the content owners, though, have the broad, recognizable brands that would enable them to go it alone in any meaningful way, though CBS is one of a few to be testing the waters. What they would much prefer is to partner with a player which itself has leverage and a huge potential market for TV services, and that’s where Apple comes in. To be sure, Apple today is a tiny player in the overall video market, which generates about a hundred billion dollars in the US each year, the vast majority of it going through the cable providers. But what Apple has is eyeballs, credit cards, and platforms, all of which could be applied to such a service. Apple’s leverage is entirely in its potential as a provider.

The problem, though, is that any such move by the content owners would be seen for what it is – a gambit to break down the power of the traditional pay TV providers. And as such, those providers would retaliate. They have power over these content owners in several forms, with the harshest being refusing to carry channels, but the more moderate (and more realistic) being withholding marketing dollars from promoting those channels and the packages that contain them. Until such a time as any new partnership delivers equivalent benefits (which seems far off at best) they simply can’t afford to sacrifice their existing relationships.

Apple tried one way, but now for plan B

All this creates a dilemma, and a need for a strategy which balances these competing demands. The content providers need to forge partnerships which allow them to build leverage over the pay TV providers without alienating them. For this reason, and because Apple understands the inherent challenges of going up against the pay TV providers, Apple’s plan A was to work with the pay TV providers, rather than against them. It reportedly worked with Time Warner Cable before the Comcast deal was announced, and then switched to Comcast itself, but apparently without success. Comcast is unwilling to yield two things: the customer relationship, and the lucrative set top box fees that go with controlling the delivery of the TV service. Apple would have displaced both of those in a deal with Comcast, which meant it could never happen. Comcast apparently made this clear, and so Apple went to plan B.

If Apple is successful, of course, Comcast will lose both the things it refused to sacrifice in a much worse way than it would have done had it dealt with Apple instead of shutting the talks down. At this point, its greatest leverage is its NBC Universal holdings, with NBC apparently the major holdout broadcaster, but that’s far from a deal killer for the service Apple is creating. Disney is arguably the most important content partner, with its ownership of ESPN, but with the other major broadcasters on board too along with several others, and the recent HBO deal, Apple suddenly has a pretty compelling proposition on the way. The big question now is how the larger game of chicken plays out. So much of the success of Apple’s service will depend on the exact pricing and structure, and the completeness of its content offering. And that’s where the game of chicken comes back in. If the content owners provide overly attractive terms to Apple, they undercut their relationship with the pay TV providers. If the terms aren’t that attractive, Apple’s service won’t be priced competitively.

The challenges ahead

Some of the content owners – Viacom among them – are likely to be more desperate than others, and will sign up with Apple at decent rates. Others have already shown their willingness to break ranks with the pay TV operators through their deals with DISH’s Sling TV. But others will want to tread a more careful path, and that’s the other challenge Apple faces: being truly disruptive to the current model when it can’t undercut on price, and may well end up building a comparable bundle without the a la carte options some consumers (think they) want.

One other interesting piece of leverage Apple has with the content providers is its ability to track usage across its various devices, and across live/linear, DVR, and VoD, something advertisers are particularly keen on and which traditional pay TV providers have struggled to deliver. At some point, all of this reaches a tipping point where Apple’s TV service (and those like it, from Sony and potentially others) gains enough momentum and customer and content provider support that all the content providers can swing their support fully behind it. At this point, Comcast’s refusal to play ball with NBC content will become increasingly untenable, and I would bet Apple would make it very clear (either directly or through the media) that Comcast is to blame for NBC content being absent. The big question is how long it takes to reach this tipping point, and whether Apple can get enough support in the meantime to make things worthwhile.

Of course, for some consumers, simply being rid of the cable operator would be benefit enough, but of course Apple won’t be providing the broadband service over which these services will be delivered. The cable company will still play a role in many cases as the broadband provider, and with the loss of valuable TV revenue it’ll be tempted to compensate by raising broadband prices. If cable operators then also offer comparable over-the-top TV services as a retention strategy, the appeal and impact of Apple’s TV service may be further blunted. Apple’s differentiation will be greatest in the areas it specializes in – creating great user experiences across devices. Apple can apply some of what it’s acquired through Beats to develop recommendation features, and surely has plenty else up its sleeve. The effectiveness of this differentiation is ultimately what will drive Apple’s success or failure as a truly disruptive TV offering.

Updated Android Auto and CarPlay support

This week, Apple updated its website with regard to auto makers’ support for CarPlay, and I’ve taken the time to update my charts and tables on support for both CarPlay and Android Auto (my previous post was here, and has much more analysis than this post, which mostly updates details).

Here’s the new master list:

CarPlay and Android Auto March 2015

The big changes are mostly on the CarPlay side, with Renault and the Volkswagen group (including VW, Skoda and SEAT) coming on board. Android added Opel in the interim, but I couldn’t see any others. This backs up Tim Cook’s assertion from the Spring Forward event this past Monday that all the major groups are now onboard. Interestingly, the main brands missing are still some of the high-end luxury sub-brands and specialty makers, including Tesla (which was the subject of questions and remarks from Tim Cook at the shareholder event this week). Apple Insider points out that the major Chinese manufacturers are also missing.

Here’s the summary by group, which hasn’t changed much.Car groups March 2015Finally, we still don’t know exactly which models and cars will have CarPlay in the near future – Tim Cook mentioned 40 models by end of 2015, but that’s not a ton in the grand scheme of things. I’m going to be heading to the New York Auto Show later this month, and keeping a close eye out for signs that CarPlay and Android Auto are showing up in more cars – both were conspicuously absent at CES.

Thoughts on Apple’s Spring Forward event

I had the opportunity to attend Apple’s Spring Forward event yesterday, and wanted to give my quick take on both the event and the brief hands-on I had with both the Apple Watch and the new MacBook. I’ve already written about Apple’s ResearchKit announcement over on Techpinions (for Insiders), and put out a brief comment for reporters yesterday too.

A surprising order

Apple often starts its keynotes with a minor update on retail and other statistics, and this one was no different in that respect. However, it then normally focuses on the main event, followed by one or more additional items – the legendary “one more thing” Steven Jobs was so fond of. What was so interesting to me here was that the Apple Watch was the focus of all the pre-event speculation, and yet it was held for last, almost an hour into the event, and was given only just over 30 minutes of its own. Much of that first hour was taken up with several other announcements: ResearchKit, the new MacBook, the Apple TV price drop and the HBO Now exclusive. I think the reason for this order was likely that Apple had already covered the basics of the Apple Watch in September, with little new information to be announced yesterday other than price and availability.

ResearchKit

See my Techpinions piece for a deeper dive into what I think ResearchKit means and represents for Apple, but in some ways this was the announcement I was most excited about. It suggests various things about Apple and its potential, not least its ability to marshall its considerable resources and its installed base not just in the service of selling more product, but also in the service of doing good in the world. I see this is as a first move beyond the hobbyist self-tracking that’s usually associated with health and fitness trackers and into something that’s truly meaningful in the field of medicine.

New MacBook

The new MacBook is interesting for three key reasons: the naming and positioning, the switch to USB-C, and the technological advances involved. Taking the last first, this is clearly an example of the way in which Apple can, when it wants to, move to extend its lead in key product categories through the use of focused, meaningful innovation. Just as the MacBook Air was a huge leap forward, and has arguably maintained a lead over the competition for several years, this new device is likely to set Apple’s computers apart for the foreseeable future. It’s both a great step forward in portability and a bet on the future – a wireless future which seems more and more possible all the time, and which is being held back at this point mostly by the poor performance of wireless charging. I’ve no doubt that at some point Apple will embrace that too, but for now it’s betting instead on making battery life so long that charging is an occasional rather than a constant concern on these devices.

The switch to USB-C, and the removal of almost all other ports, is the biggest visible representation of this bet on the future, and like the removal of CD/DVD drives and Ethernet ports, will cause some consternation and complaining about the need for various adapters and such. In a scenario where someone wants to power their deice while carrying on a Skype call using an external mic and display, a MacBook user will need to plug three different items into that one port, something Apple has clearly envisaged with its various adapters. But Apple has also been laying the groundwork for this move with a variety of wireless technologies including AirPlay and AirDrop, and various standardized technologies such as Bluetooth and WiFi obviously play a role too.

Naming and positioning was the last interesting aspect, in that this device obviously looked a lot like a MacBook Air from the moment it appeared on screen, but was never referred to as such and indeed fills the MacBook slot rather than the MacBook Air slot. My sense is that the MacBook Air filled a temporary role in Apple’s product portfolio, necessary as long as the technologies involved commanded a significant premium over the base level, but soon to disappear as the key attributes (thinness, lightness, massive battery life) make their way into the MacBook line. Over time, Apple is likely to go back to the 2×2 matrix Jobs trumpeted when he returned to Apple – pro and consumer laptops, in two flavors rather than three.

I had an opportunity to use the MacBook for a few minutes at the event, and it’s truly impressive in terms of the thinness and lightness combined with the amazing screen. The absence of a fan is a plus in some ways, but it’ll be worth watching the reviews for the tradeoffs in terms of performance. Others have pointed out that the specs and performance may be more on a par with Macs from several years ago than any of recent vintage, but I’m curious to see how real-world performance is. Talk of taptic feedback in the keynote had me concerned – I’ve never been a fan of haptics in devices – but the instantiation in the MacBook trackpad feels nothing like any haptic technology I’ve ever experienced before. It’s basically used to provide a second-layer clicking feeling for the “force click” even as the new trackpad doesn’t actually travel. It’s another one of those things that has to be experienced in person to be understood, but it’s very effective, along with the new on-screen functionality associated with that force click. The keyboard keys are different enough that they were tricky to use at first, with quite a few typos, at least partly because the keys are wider than in the past. But I’m guessing it’s the kind of thing you’d quickly get used to.

Apple TV and HBO

The Apple TV and HBO Now announcements are interesting partly for what was announced on Monday but at least partly also because of what they signal about the future. HBO Now has some potential, and as I’ve said elsewhere I think a big part of the success will depend on how effectively HBO can get people who currently use someone else’s HBO password for HBO Go to switch to paying $15 per month for their own service. At least part of that will be about making the first real efforts to discourage sharing of passwords, and I’m curious to see how they accomplish that. The price cut on the Apple TV is clearly a concession to the much-lower price of the various streaming sticks such as Chromecast – the new price is now 2x the Chromecast price, whereas it was previously around 3x the price.

But the more interesting thing is what trends these two moves presage. A shift to a cheaper Apple TV suggests either that a new device might be coming or that Apple’s focus going forward might be less about making money on the hardware an more about seeding a base of devices that can in future subscribe to a TV service from Apple (or perhaps a range of services from various providers). I’ve written on Techpinions about what I think it would take for Apple to really turn the Apple TV into something other than a hobby, and it’s really about providing a fully-fledged subscription TV service on the device (and of course on other Apple devices). Apple is no doubt taking a cut of the HBO Now revenues, and is handling billing and so on for the service. App Store revenue sharing would suggest at 30% cut, but I’ve no idea if that’s accurate. I do think this makes it more likely that we see some sort of TV service from Apple, or more deals like the HBO one that allow Apple to act as the aggregator of a loosely-bundled pay TV replacement, and I’ll probably write more about this.

Apple Watch

Lastly, then, we come to what was to have been the main focus of the event according to all the preview coverage, but what ended up being just the last act of a multi-act performance. The key new details were the pricing and availability details. These confirmed to me several things: the Watch Edition is important in terms of positioning and in terms of Apple’s foray into true luxury (and beyond simply affordable luxury, its past focus). But ultimately, it’ll be a marginal story, available only in few places and in small numbers, and sold at a price to make it affordable for very few people. It’s an interesting story, but essentially all the action will happen between $349 and $1100, in the two other categories. Interestingly, that might well make for an ASP very much in line with the iPhone and iPad, somewhere between $500 and $700 per unit.

I had a chance to wear the Watch (the stainless steel version) and play with it some at the event, and the first thing you notice is how much functionality is there. In my five-minute demo we barely scratched the surface of what the Watch does, and I think that’s illustrative of the challenge and the opportunity for the Watch. The use cases for different people will be at least as diverse as they are for the iPad, with third-party apps making up much of the value proposition. Apple talked about three broad things the Apple Watch does: timekeeping, intimate communication, and health and fitness tracking. And there will be some number of people for whom each of these is perhaps the main focus. But there will be many more who will end up using the Watch for a combination of things that doesn’t fit neatly into any of these three categories, but rather combines both pre-installed and third-party apps in a way that creates a mosaic of useful experiences. That makes it challenging to market, but as I’ve said before I think the early adopters who buy the Watch right off the bat will be a big part of how the device reaches the next wave of people, as they discover its usefulness and communicate it to others.

Edit: I’ve been asked by a Twitter follower to add a little more on my experience with the device. It fit well on my wrist, was comfortable and felt very much like the analog watch I normally wear. It instantly felt better than pretty much any of the other smartwatches I’ve worn, at least in part because of the quality and fit of the band. The materials looked great on the one I tried and the others. The screen was responsive and easy to use. The best way to think about the buttons is that pushing the digital crown is like pushing the home button on an iOS device – it always takes you back to the main screen. The other button, meanwhile, is the communication button, which is an interesting departure for Apple – a dedicated button on a personal device for a specific set of functions. There’s lots of swiping involved too, whether to get to Glances, to swipe between Glances, to navigate on the main apps screen, to select emoji and so on and so forth. Then the digital crown is also used for scrolling and zooming, in some cases with the digital crown offering vertical scrolling and swiping on the screen controlling horizontal scrolling. I’m not going to go into any more detail just because I think it’s worth waiting for a thorough review.

I’ll no doubt write more about all of this going forward, and I’ll have at least one other piece on Techpinions later this week (Thursday is my regular day for my public column), but would love to hear your thoughts in the comments, as always.