Simultaneously, technological advances have allowed advertising to progress along a different axis – to become more targeted.  Advertising used to only be broadcast widely through newspapers and television shows.  The best an advertiser could do to ensure their message reached the right kind of people was to select the aggregate demographics of everybody who read a particular magazine.  Now the internet allows ads to be targeted as precisely as you’d like.  Today, Google lets you get your message only in front of people who are about to buy a product like yours.  The ability to connect to people who have expressed an intention to “buy digital camera” is a literal gold-mine, making billionaires out of Larry, Sergey and Eric.  As effective as it is, targeted advertising won’t replace broadcast advertising, because there is still value in abstract brand-building.  Rather, the two will complement each other.

Enter Social Media

Social media has been all the buzz recently.  At its core it’s just a more convenient way for friends to communicate.  The “killer app” for computers has always been helping people communicate, and this is just another chapter in that book.  With this new communications medium comes a new opportunity for organizations to tell their stories.  In fact, I believe that social media will bring another tectonic shift in the entire marketing industry, possibly as important as search-based advertising.  As consumers have gotten more and more sophisticated at filtering out advertising from broadcast media, advertisers have gotten more and more desperate in their attempts to connect with people.  Social media marketing offers a new path – instead of hearing about products and services through ads, people can hear about products and services from their own friends.  Exactly how this will play out through Twitter/Facebook/Foursquare/whatever is not at all clear to me right now, but I fundamentally believe this change is coming, and it will take the entire marketing industry with it.  Klein and her fans are free to unplug from popular culture in order to avoid the onslaught of brand advertising, but they would be foolish to stop talking to their friends just because their friends are happy with things they’ve bought.

This vision is one of the main things that prompted me to jump off the comfy Google cruise liner and start paddling hard in Banyan Branch’s crowded dinghy.

Is marketing intrinsically evil?

I sometimes feel a need to justify this line of work to those who think that marketing is inherently dirty.  I admit that I’m more of a capitalist than many of my friends, but I certainly recognize that capitalism has its limits.  The vast majority of economic transactions are both consensual and mutually beneficial, and I will argue vigorously that there is nothing wrong with an economic system consisting of these transactions.  The biggest exception to this happens when transactions are not mutually beneficial because one party is not fully informed.  But what we’re doing is helping people share honest opinions and feedback about the things they buy and use.  By lubricating the flow of information between real people, I believe social media will reduce the effectiveness of deceptive marketing.  Moreover, it will help companies connect to their customers and hone their goods to people’s real concerns and desires.  It will help hold companies accountable for their mistakes, and enable companies to better make things that make people happy.

Additionally, I will point out that my employer represents no small amount of “pure good” for the world, including organizations such as The Bill & Melinda Gates Foundation and Vittana, helping them tell their stories.

Taking a chance on a startup

Why did I choose this opportunity out of the sea of possibilities?  I evaluated the landscape as an investor would, since I am investing no small chunk of my life in this effort.  From my entrepreneurial training and experience, I know that smart investors care more about the people than the specific business plan.  The plan will almost certainly change, but the key management will not.  Having known one of the founders of Banyan quite well for a number of years, I am certain that many key elements for success are in place.  The corporate culture and governance will be solid.  I will be working in an environment where I am supported, and where I can learn and grow as a manager and a technologist.

Exactly what will I be doing or building?  I admit I’m not sure yet, but I have some very interesting ideas that I won’t be sharing here anytime soon.  I am sure that my work is very well positioned to be a part of a major shift in an entire industry — a rare opportunity.  Whether or not my work will play a key role in this shift is somewhat out of my hands — these things are always a roll of the dice.  But in another sense, it’s entirely within my control, and this is what I love about working in a small company.  There’s almost nothing but work between me and effective execution of our ideas.  Many people tend to exaggerate the importance of the idea itself, forgetting that it is incredibly important to execute well on whatever ideas you have.  I’ve heard people say that they had the idea for YouTube years before YouTube did.  How quickly we forget the dozens of other companies all working on the same problem in 2006, which almost all fell by the wayside because they didn’t execute as well as YouTube did.  Ideas matter for sure.  But hard work is critical.

If you’d like to jump on this raft and start paddling too, get in touch with me.  I need a few key rock-star developers who are’t scared of chaos and can think creatively about business problems.

Apple products are expensive. Apple gets high margins on its hardware, allowing it to recoup large investments in NRE (non-recurring engineering) to design the hardware and its accompanying software.  This is a great place to be from a competitive standpoint, because as a company they don’t need to squabble over the cheapest parts to try to deliver the best prices to consumers.  So long as they can maintain a sufficiently large customer base to support the practice, it is an easy place to defend against competition from.  Certainly a lot easier than being Dell or HP, who struggle with operational efficiency to compete on price, and try to innovate within a very narrow window defined by their platform.

Apple’s success at selling high-end products has secondary benefits for the rest of the ecosystem.  Because the products are expensive, they tend to be purchased by people with more disposable income. So the segment of the computer market which buys Apple products self-selects to be very attractive demographic for many other reasons.  Advertisers love to get their products in front of people who are more-willing-than-most to buy something expensive / unnecessary / fun.

Similarly, app developers know that if they write an app for iPhone / iPad, the people who are able to buy it are much more likely to be willing to pay a couple bucks for something silly than, say, somebody who bought the cheapest smartphone they could afford because they felt they really need that functionality.  I had previously speculated that Apple’s platform play required a very large distribution base to attract developers, which is not quite correct.  The strategy is successful even with a relatively small market, provided that the market is segmented properly.  Which in this case it clearly is.

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.

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.

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.