Embracing Chaos

My girlfriend has a kindle that she very much enjoys.  One of the biggest benefits from it she gets is having a large amount of content in a very small device.  She is a scientist who is very much an information worker.  Having access to a great many research papers in searchable form is very useful for her.  (If only the PDF import worked on multi-column papers!)  She also tends to live out of a backpack, so being able to have several interesting things to read at any give time is very appealing.

So she’s often reading her kindle on the bus.  She’s noted one interesting difference between reading her Kindle and reading a regular book while on the bus.  When she’s reading a normal book, people will ask her what booj she’s reading or will look at the cover and just talk to her about the book itself.  With the kindle the question is always "how do you like the gizmo?"  Which gets old after a while.

Here’s a suggestion to Amazon on how to address this social problzem: offer full-color PDFs of the covers of books that you purchase for the Kindle, so people can print out their own covers.  These could slide into a convenient holder on the Kindle’s attractive leather case.  Long-term it’d be great to have a color e-paper cover for the book, but we’re not holding our breath for that one.

Coincident with the launch of the iPhone 3G hardware, Apple has started
a couple of new online services: MobileMe and the iPhone App Store.  In
some ways these are natural extensions of existing product lines.  But
I believe their launch actually represents a fairly substantial
strategic shift as Apple attempts to diversify from a hardware-only company to one that runs on a mix of hardware and services. In order to make this strategy work, Apple will need to sacrifice its much coveted high hardware margins.

Diversifying from hardware

Since Jobs pulled the company
out of the doldrums, Apple has been a
manufacturer of high-end hardware.  This is a very nice place to be.
Their margins are very high.  If you compare the hardware bits that go
into a Mac to those in any PC, Apple’s prices are much higher.  PC manufacturers
squabble over low single
digit margins because their product is almost completely commoditized.
HP, Dell and IBM struggle to differentiate themselves in the market.
Meanwhile Apple can charge a hefty premium for good industrial design
and software that is slicker than windows.  iPod followed in this
tradition of high margins by setting the bar for usability in portable
media devices and following up with fantastic marketing.



Being a niche retailer of high-end products is a comfortable and stable
place to be.  However, having a single line of revenue isn’t good for a
large company, so diversifying makes a lot of sense.  Thus Apple’s current push into services.

The iTunes music store was an important pre-cursor to the current push
into services.  Even though iTunes moves a massive volume of music, if
you work through the accounting confusion, they’re not actually making
much money there.  Because the established music industry giants are
completely fucked and have no
idea what to do, they drive the margins of all big online retailers
down to a pittance.  But iTunes did something very important for Apple: it established a billing relationship with customers. Cellular operators have this
kind of ongoing billing relationship with their customers which enables
them to push high margin, low utility products like ring-tones. Similarly, people
are used to spending small quantities of money in iTunes to get music.
So iTunes is the perfect precursor for an App Store.  In this way,
Apple doesn’t even need to rely on the carrier’s billing relationship
to build a services business.  This will be very important for Apple in
coming years as carriers increasingly become just another provider of
wireless bandwidth.  In the coming decades, the value will not come
from piping bits around.  It will come from the services built on those
pipes. 

MobileMe is a very Apple service

MobileMe is a cloud-hosted email, contact and calendaring solution.
There’s nothing revolutionary about this.  Google offers all of these
services for free.  By charging for these services, Apple is implicitly
promising to provide a better solution.  Considering their vertical
integration into popular hardware, it’s not hard to imagine that they
will succeed at this.  Google will probably remain committed to supporting
open standards for working with hardware.  By using proprietary
protocols, Apple can provide a higher-quality product and support it
better on the few platforms they care about.  It’s a classic story
we’ve seen in this industry before.

MobileMe’s launch was a
disaster.  This isn’t surprising as Apple is yet to demonstrated great skill in online services.  Personally I believe they’ll figure it out, because it’s
important to their long-term objectives, and they’re a smart company, and the skills to do this well are getting easier and easier to find.
But from a marketing perspective, MobileMe is nothing new for Apple.  Because
MobileMe is a premium service for which there is a very good free
alternative, MobileMe still targets Apple’s classic market segment.
They’re still targeting people who are willing to pay extra to have
something really polished.  They can stick to their classic bag of
tricks, like the ads that make fun of people who aren’t as cool as the
mac devotees.

App Store is new: a platform play

App Store on the other hand is going to be much harder for them to pull
off.  For App Store to succeed, their primary challenge is not to
attract paying customers, but developers.  Because independent software
developers (ISVs) are the ones who are actually creating value in the
App Store.  App is just a distributor taking a cut on that.  So what
attracts developers to the App Store?  Customers do.

It’s a real chicken and egg problem.  Nobody’s going to build software
unless there are customers to buy it, and it’s hard to get customers
without cool apps.  Well right now Apple has the whole farm, but it’s a
very small farm.  There are millions of iPhones out there, representing
potential customers.  Moreover, the iPhone SDK is very rich and capable
when compared to its competitors.  Qualcomm’s BREW, Windows Mobile,
Palm OS, Blackberry and Symbian have all faltered for one reason or
several.  Google’s Android holds much promise and hope, but at this
point it’s complete vapor-ware.  So for now, Apple has almost all the
mindshare of mobile application developers.

But how long will this dominance last?  Software platforms are natural
monopolies, meaning the
economics tend to be winner-take-all.  The chicken and egg “problem”
can easily turn into a virtuous cycle, pushing a winner to the top.
Application developers are fickle and will code to whatever platform
has the best distribution.  iPhones are very popular, but they are
still only used by a small fraction of all mobile subscribers.  Until the distribution of iPhones reaches a critical mass, their dominance as a mobile application platform is very shaky.

The mobile app challenger is HTML

But the laundry list of alternatives shows that the competition is
fragmented.  What could unseat Apple?  IMHO it’s not another
application platform, open or proprietary.  It’s the web.  Every
high-end phone can display web pages, and increasingly they’re using
high-quality javascript engines that can run real web applications.
Webkit, the super-fast open-source HTML/JS engine behind Safari is
showing up in Symbian devices, Blackberries
and Windows Mobile phones.

Apple’s challenge is to make the proprieray iPhone SDK compelling to
developers.  The alternative is to build a web application that works
well on webkit, and works on every high-end phone.  They can attract
developers in two basic ways — make the native features of their SDK
more compelling, and provide a large market for distribution of the
applications.

Charging for distribution of these applications is a gimick that won’t
last long.  Soon all the interesting applications will be free, but
tied to cloud services that have their own business models independent
of the mobile client.  Premium applications will start to seem a lot
like premium ringtones pretty fast.  Still, it will help bootstrap this
market for Apple so long as there are no serious competitors.

To stay on top, iPhones need distribution quickly

One thing that ties all these points together is that Apple’s continued
success with App Store hinges on having wide distribution of iPhones.
They are currently throttling the distribution of iPhones for some reason, possibly
because of software glitches.  But the aggressive $199 pricing is
clearly aimed at attracting a new larger customer base that will help
maintain their dominance in the mobile application space.

Long term they might be happy getting by offering premium versions of
applications that are freely available on the web.  But something tells
me they’re actually trying to break open the mass market on this one.
This is Jobs’ big play.  It’ll be really interesting to see how it
works out once Android hits the streets.

Here I propose an alternative explanation for iPhone scarcity: the difficulty in obtaining a new iPhone keeps people from complaining about problems with it.  I will explore this sophisticated marketing technique that Apple may or may not be employing to cover up quality problems with the new iPhone 3G.  Even if Apple is not doing this deliberately, I assert that it is a valid and potentially very useful technique if your product is lucky enough to have the prerequisites.

New iPhones are hard to get

The blogosphere is full of speculation about whether or not Apple deliberately made the iPhone scarce on opening day and since then.  Most assume that this is deliberate on Apple’s part for a variety of reasons, mostly to attract more attention, increase demand, etc.  I assume most of these rants are from bloggers who want their new iPhones but haven’t overcome the barriers to obtain one yet.

But if Apple’s goal was purely to meter out their distribution, why not sell them online?  To get a phone you need to place an order for one, wait a week or two, and then you can get it.  This seems reasonable in conditions of scarcity.  But to get an iPhone 3G, you need to walk into an at&t store to place your order, and then walk into the store again to pick it up.  Think about this.  If the limitation was purely lack of supply then there are several ways this could be easier for customers:

1. You could order a phone online to be delivered to your house.
2. You could order a phone to be delivered to your nearest at&t store.
3. You could call the nearest at&t store to place your order, but still have to walk in to pick it up.

Try asking them why you can’t do any of these things and they will answer with one word: policy.  Clearly Apple & at&t have gone out of their way to make it difficult for people to get their hands on a phone.   This goes above and beyond just preserving a limited supply.  You have to work to get an iPhone 3G.

New iPhones have Issues

From all the reports I’ve read, the problems with the new iPhone are in the software not the hardware.  I conclude this because my friends with first generation iPhones are experiencing the same problems as those with the new 3G iPhones.  Moreover everybody seems to agree that these problems only showed up after they upgraded their iPhone software.  Problems include:

• Frequent crashes of applications, especially Safari
• Increased lag in common operations
• Significant problems with large contact lists (>200 contacts)
• Extended delays before placing a call

Apple is legendary for their high quality software.  People buy Macs because they "just work."  It’s really not like Apple to release a buggy piece of software.  But it sure seems that they did in this case.  Why?  Obvious answers of fierce competition for high-end smartphones.  The more interesting question for me is "How did they get away with it?"  Which it sure seems they are.

Escalation of Commitment: The Hush-factor

There’s a well-document psychological principal at play which prevents people from objectively critiquing things that they are personally invested in.  Sometimes called escalation of commitment, or irrational escalation, the idea is the same.  If somebody works really hard to obtain something, they will blind themselves to its faults.  Imagine this conversation:

"Dude, I can’t believe you waited in line for hours to get that phone.  What do you think of it?"

"Actually, it’s just okay.  The applications crash a lot.  And it’s not nearly as fast as I’d hoped it would be — sometimes it just hangs for like 10 seconds.  But at least it’s pretty."

Very few people have the objectivity to imply that their personal sacrifice was not worth while.  This effect is commonly observed in people who buy high-end items. 

The flip side of this effect is buyer’s remorse.  But since the phone itself is not actually at all expensive (when compared to the monthly fees), that’s unlikely.  Also, it has become a positional good, whereby it has value simply because other people don’t have one.  That fact remains regardless of how unreliable it is.

Speculative Conclusion

I posit that Apple knew about the software problems with the iPhone 3G before launch.  They did manage to iron out all the performance and stability problems they encountered before launch.  They felt they needed to launch it this summer to get ahead of other notable smartphones like the Blackberry Bold, HTC Touch, and Android which are hot on their heels.  So they rushed it out the door at sub-standard quality.

In order to partially cover for this mistake, they have made this device especially hard to get.  This covers their tracks in two ways: people make even more noise about scarcity.  And those who do jump through the whoops to obtain one are far less likely to complain about it.