Earnings, Q1 2015, Quick Thoughts, Yahoo

Yahoo’s tiny, slow-growing mobile business

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We’ll have to wait for the transcript to be sure, but Marissa Mayer must have described Yahoo as a mobile-first business a dozen times or so on the earnings call this afternoon. However, as Yahoo has also been quantifying its mobile business lately, we have some hard numbers to evaluate this claim by, and they’re not all that good at backing up her repeated claim.

First, here’s mobile as a share of revenues for Yahoo, as compared with Facebook and Twitter. Yahoo’s number is expressed as a percentage of what it calls “traffic-driven revenue”, while Facebook and Twitter’s are as a percentage of ad revenue, which likely means much the same thing:

Yahoo mobile ad percentagesYahoo’s percentage is clearly growing somewhat, but not very fast, and it’s clearly light years behind Facebook, which began life as very much a desktop business, or Twitter, which has arguably always had a mobile-centric approach, especially to advertising. Those are mobile-first businesses: it’s hard to argue on this basis that Yahoo is.

Another way to look at things is revenue:

Yahoo mobile ad revenuesHere, fledgling Twitter, which had just $20 million in revenue in Q1 2011, has already passed Yahoo and seems to be lengthening its lead. Facebook, meanwhile, is in a whole different league, and also growing much more rapidly. Again, Yahoo is clearly no mobile powerhouse just yet, and at these growth rates it’s just going to get left further and further behind.

If Yahoo is taking a mobile-first approach to product development, that’s clearly a good thing, and it certainly seems to be the case. But a company that has over 80% of its business tied to the legacy desktop world has a long way to go before it can call itself a mobile-first company.

Earnings, Q1 2015, Smartphones, Tablets, Verizon, Wireless

Thoughts on Verizon’s Q1 2015 earnings

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Verizon reported results this morning. In listening to the call and reviewing some of my numbers, I was struck my the fact that Verizon is in the midst of several important transitions. I’ll highlight three here today:

  • Converting the phone base to smartphones
  • Converting the phone base to installment billing
  • Converting broadband subs to FiOS

Each of these three transitions is largely about moving a portion of Verizon’s base from one thing to another, rather than about growth per se, but each has a financial impact, and two of the three are accompanied by new growth opportunities.

Converting the phone base to smartphones

The first transition is converting the phone base to smartphones, and specifically to 4G LTE smartphones. Here’s what that process looks like at Verizon Wireless:

Converting base to smartphonesAs you can see, the total number of phones isn’t really growing much (in fact, Verizon lost phone customers in Q1). But smartphones within the base, and especially 4G smartphones, are growing very rapidly. The financial impact here is that smartphone owners, and 4G smartphone owners in particular, consume lots more data. In a world where almost every plan includes unlimited text and voice, the path to growth from these customers is increasing data usage, and getting them on a 4G smartphone is the best way to do that. This growth opportunity will last for another couple of years at least – there are still 11 million 3G smartphones and 17 million basic phones in the base to convert. But at some point it will come to an end. Continue reading →

Earnings, Netflix, Q1 2015, Streaming, Video

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: Continue reading →

Adoption, Android, Android versions, Apple, Google, iOS, iOS 8, Smartphones

Contrasting iOS and Android adoption patterns

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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. Continue reading →

Apple, Apple Watch, Reviews, Smartwatches

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.

Broadcast, Meerkat, Periscope, Quick Thoughts, Twitter, Video

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, Payments, Retail

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.

Facebook, News, Quick Thoughts, Video, YouTube

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, Apple Watch, Choice, iPhone, Malcolm Gladwell, Platonic ideal, Product, Spaghetti sauce, TED

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.

Apple, Apple TV, CST, TV, Video

The challenges ahead for Apple’s TV service

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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.