Coyote Tracks

Instapaper’s Marco Arment recently wrote a blog post in which he said, in part,

I bought my first iPad magazine last weekend: one issue of The New Yorker. It was $4.99. Most entire apps (including mine) cost $4.99 or less, once, and this magazine is $4.99 for just one issue. Ignoring what content and apps “should” cost, and despite knowing that this is a very good magazine, this felt expensive.

You can make the case that it shouldn’t “feel expensive,” but this isn’t a new or novel complaint. It’s something that a lot of people think when they look at digital content. Marco also noted,

[Advertising] doesn’t feel as offensive in contexts that have always had it, such as printed newspapers and magazines, or cable TV. But ads shoved into a non-free iPad or web publication feel wrong.

Again, this isn’t something we haven’t heard before. So I was mildly surprised at the vitriol I’ve seen tossed about because of it. People railed about how he clearly doesn’t know anything about magazine economics, and they generally didn’t put it that tactfully.

Certainly, Marco’s posts don’t reflect magazine economics the way they exist for most commercial publications, where advertising can often be upwards of 80% of the revenue. They don’t reflect the production workflow of people who are used to working in InDesign and with weekly/monthly deadlines. They’re not from someone who’s responsible for direct content creation.

And… so what?

When somebody bitches about the price of their dulce de leche triple-shot no whip dry decaf poopaccino at Starbucks, they don’t have to know all the economics that went into that price. What they have to know is whether they can walk next door and get something they like about as much for 50¢ less. If the answer is yes, Starbucks loses a customer. Individually, that’s not a big deal. If the answer is yes for a sufficient number of people, though, Starbucks has a problem.

The only relevant question is whether the feelings Marco describes are some kind of weird edge case, or if they’re shared by a substantial portion of the audience. These are not “this makes me feel happy” feelings, these are “most consumers feel like buying books through Amazon rather than going to Borders” feelings. This is what business analysts call consumer sentiment. If you get on the wrong side of consumer sentiment, you may find yourself in a situation business analysts call bent over with a broom handle.

If too many consumers share Marco’s feelings, you need a different business model. And it’s your job to figure out why the guy next door is selling that poopaccino for less than you are. People who don’t know a damn thing about your business can correctly tell you your model is broken without being able to tell you how to fix it.

The battle between “forcing consumers to accept the business model we’re used to” and “consumers forcing you to change your business model” is still in its early stages, but we do have some data to suggest which side is ahead. The music recording industry, when they were dragged kicking and screaming into the digital age, wanted DRM. They didn’t want high bit rates. They didn’t even want you to be able to unbundle tracks from albums. I think we know how that went. Right now the TV & movie industry are doing their damnedest to keep DRM and bundling alive; raise your hand if you think, over the long term, that’s going to work out for them.

In my experience, the younger someone is the more likely they are to see their computer as their primary entertainment hub, because the more likely they are to have grown up with the Internet. I’ve had discussions like this with a few friends under thirty, and damned if I didn’t hear two beliefs echoed pretty consistently. Electronic delivery should be cheaper than physical, and we shouldn’t have to pay for ads. Sound familiar?

Okay, yes. Maybe they’re all weird edge cases, too. It’s all just anecdotal.

But if they aren’t, then what?

(Warning: personal reflection lies ahead.)

My career trajectory in Silicon Valley has been less developer than billiard ball: short-term contract/consulting jobs, and two full time employee positions that both came to a premature end due to economic blues. I’ve been thinking about a contract-to-hire gig that not only never reached the “-to-hire” stage, it lasted such a short time I don’t put it on my résumé.

This was at a company many people haven’t heard of, but they’ve been around a long time and were one of the big names that started what became Silicon Valley: before the dotcom boom there was the microprocessor boom, and before that was the aerospace boom. (Before that? Stone fruits.) These guys were aerospace and they needed somebody to be an assistant in mission control. How cool is that, right?

I don’t remember what the title was—Operations Something—it didn’t seem to have much to do with the job. (Forewarning one.) What they wanted was described as kind of a technical writer and kind of a webmaster and kind of a reports analyst, all sorts of things that I’ve done before.

Bill was the Operations Something already in this position; he was retiring at 50 to go back to school (another “how cool is that” in my book). I got to work with Bill for a few weeks ostensibly learning the ropes. Except there really, well, weren’t many ropes. Or maybe it was all rope. Bill did maintain the internal web site, a huge static morass that mostly served as a document repository, done in HTML 3.2 full of <font> tags and tables and mixed case URLs with spaces in them. He wrote reports occasionally, of very proscribed form. Mostly what Bill did, from what I could tell, was herd cats, the cats in question being the mission directors. (Forewarning two.)

By the end of three weeks I was familiar with a lot of the operations, but the mission directors didn’t have time to explain much, the IT director didn’t have time to explain much, and there was this whole “you’ll pick it up as you go along” air. Bill, for his part, was glad to be getting out. As much as he liked the company (he’d been there twenty years) the job he was in—the one I was taking—was one he felt had no upward mobility potential. (Forewarning three.)

It was, after a month, clear to me that what the company wanted was not what they had defined as an operation something something; that was a job description and title that came from what Bill had done for them, with ten years of experience at the company already under his belt before he got to that department. I’m sure they worked with Bill to describe what it is he did, but that’s tough. My strongest points—web development and technical writing—turned out to be the least important: Bill’s intranet site was, by even pretty lax standards, crap, but that didn’t matter. The most important part of the job turned out to be trying to continually get data out of career aerospace engineers. I can be a people person, but I’m not so good at being a pushy person. Bill was an excellent pushy person, in that he could be pushy and still be likable. At this particular company, part of that almost certainly came from the fact that, simply, he was one of them: he wasn’t an engineer, but he was a career aerospace guy.

I think it was only about a month after that when my boss suggested things weren’t working out. He felt I “wasn’t being proactive,” which pissed me off—but he was right: I knew it wasn’t working out weeks before that, and I should have been the one going to him to say, “You know, as cool as this place is, what I think you need isn’t what I can give you.”

This has been back on my mind because I’ve decided I don’t want to end up doing something I’m going to be frustrated with (or make my employer frustrated with me). I’m still not 100% comfortable with the consulting lifestyle, in part because until you can pick and choose your clients you choose projects based on “will this pay the bills” rather than “does this excite me.” Yet I’m starting to ask: does this role feel right for me? It’s flattering to be solicited to apply to be a developer evangelist for a product I’m not using—not a hypothetical example—but unless I not only start using it but get really excited about it, am I going to be the guy they want to evangelize that product? If your company’s pitch is “finding ways to deliver mobile phone ads to billions of second- and third-world consumers”—also not a hypothetical—is that actually something I’d even want to help with? It’d be nice to find a place I could be Bill for—but it’s tough. It may require building a company myself, which I can’t say I haven’t thought about. (Maybe I should be a writer!)

I don’t know whether the aerospace company ever found a new Operations Something who had less web nerd and more pushy people person, a combo that might have been able to pull it off. I heard that the position got defunded in their next fiscal year—which doesn’t surprise me. Ultimately, I think they were paying Bill to be Bill.

There’s a lot of questions being asked about the Apple-branded full shebang TV set that’s being feverishly rumored right now: What content would it give you? What connections would it have? Would it be upgradeable? How would they service it (if it’s a 42″ or bigger HDTV, it’s not like you’re going to throw it in your car and bring it down to the Apple Store if there’s a problem)? Could you still get over-the-air, cable or satellite transmissions?

But all of those—even the serviceability—are essentially implementation details. They’re what you work out after you’ve decided to tackle the problem. The big questions are the ones that drive you to tackle the problem in the first place. And the elephant-in-the-room question is this:

What would an Apple television set give me that an Apple TV box connected to my existing TV set wouldn’t?

So far nobody’s presented a case I’ve seen for a full-fledged Apple television, rather than the $99 Apple TV box, that doesn’t boil down to two things.

• An Apple-branded television set would be really awesome.
• No separate HDMI and power cord for a set top box—two less cables!

It seems evident that Apple doesn’t like to move into a market these days unless they think they can bring something potentially disruptive to it. Even if you don’t own or even like the iPad, iPhone, and iPod, if you have a competing device in any of those fields that was introduced after Apple’s entrance into those fields—hell, if you’re using a general purpose computer—that device was shaped by Apple. What can Apple bring to the table here that’s disruptive?

The only thing I can think of isn’t something that’s technological, strictly speaking. In practice, you can use iTunes as an “a la carte” television replacement right now for the majority of network and cable shows; buying a season pass for $40-50 for a dozen shows could run you five or six hundred dollars, but cable and satellite easily runs over a thousand a year. But “the majority” isn’t good enough if programming you want isn’t included. Apple needs more content deals. I think it’s significant that each new update of the existing Apple TV adds new live sports content: that’s a big missing piece of the picture.

Services like Hulu Plus and Netflix streaming have a huge problem getting content, and I continue to think that this is in no small part because they vastly underprice their services—which they do because consumers continue to decide how much they’re willing to pay for content based not on the content itself but on the delivery mechanism. If you watch a dozen shows and pay $120 a month for HD cable, you’re paying around $2.50 per episode. An iTunes season pass for a 24-episode show in HD is probably going to be about $45, or $1.88 an episode. Yet consumer behavior suggests we think iTunes is the service that’s priced unreasonably.*

I wrote a few months ago that I doubted you could do a streaming service that was really capable of supplanting cable or satellite unless it was at least $30 a month, and that’s probably including ads. I don’t think Netflix or Hulu could ask that kind of price and have a snowball’s chance in hell of succeeding. I doubt even Amazon could.

But Apple? They just might.

They’d catch a lot of crap for it in the press for overcharging, and there would be a lot of pundits predicting first why it wouldn’t succeed and then rushing to explain that it was only succeeding because of Apple’s brainwashed cult of followers who will do anything that Cupertino commands. But—I suspect alone among consumer electronics companies—they might be able to do it.

The thing is, though, they could do that with the existing Apple TV box. I suspect cracking the problem of TV’s user experience is coming up with an end run around network affiliates, satellite and cable providers, all of them. That’s what Apple would want to solve. Maybe they will, eventually.

But as far as I can tell, putting that all in an Apple brand television set only solves one additional problem: two less cables.

Mike Arrington at his classily-named new “Uncrunched” writes:

In the first six month [sic] of 2011 Facebook had $1.6 billion in revenue and abou [sic] $800 million in operating income, says a source I trust a lot. That revenue number has been reported before. And the 50% profit margin is in line with last year’s $2 billion in revenue and $1 billion in operating income.

To put that in perspective, realize this – Facebook will likely be more profitable than Amazon this year. On a quarterly basis they’re already there.

Clearly, this tells us that Arrington needs a copy editor, or at least to turn on the damn spell checker. Beyond that, though, Arrington’s real point is to ask:

Does that mean Facebook is still undervalued at $70ish billion, despite the fact that recent secondary market sales are stalling? Amazon’s market cap is currently around $107 billion.

Obviously, Arrington thinks the answer is yes. “The big growth years for Facebook are just getting started,” he enthuses. It’s true that if Arrington’s “trusted source” is correct, Amazon has a lower net income: $391M for the first six months of this year.

The problem, of course, is that because Facebook is still a private company, we don’t actually know how said source defines “operating income.” If it’s more like EBITDA—which I suspect it is, not accounting for things like taxes and stock compensation grants—then it’s more accurate to compare it to Amazon’s consolidated segment operating income, not net income, which was $851M for the first six months of this year. Or, the proper number may lie somewhere in between. Who the hell knows?

My biggest concern with Arrington’s enthusiasm, though, is how he completely glosses over a point he made earlier:

Of course Amazon has far more revenue than Facebook, nearly $10 billion per quarter, and Q4 will be much higher than $10 billion. They just have terrible margins compared to Facebook because they sell (and deliver) actual stuff. Facebook delivers ad impressions and Facebook credits to buy [virtual] stuff on Zynga.

Ah. Hm. So Amazon’s problem is that they actually sell stuff, and Facebook doesn’t. Amazon’s future success hinges on consumers continuing to like mail order and digital media; Facebook’s future success hinges on consumers continuing to live in Facebook’s walled garden.

So a question from the floor, Mr. Arrington. Are you familiar with the history of “walled garden” services on the Internet as compared with the history of catalog shopping? Ten years ago you were not on Facebook, but you were shopping on Amazon already. I expect both Facebook and Amazon to be around ten years from now—but one of them is a lot more likely in 2021 to look like MySpace in 2011 than the other.

• 1 oz. sweet vermouth (Dolin)
• 1 oz. Applejack
• 1 oz. rye whiskey (Rittenhouse Bonded)
• ½ tsp. amber or dark organic agave nectar
• 1 dash Fee’s Old Fashioned Bitters

Stir with ice and strain into a chilled cocktail glass. Garnish with a Luxardo maraschino cherry or an organic cocktail cherry. Turn to face Cupertino and raise your glass.

(Yes, it’s a variant on a Manhattan. Yes, I’m having one right now. Yes, this is sincere. We mourn in our own ways.)

Out of all the pundits who will explain over the next 24 hours why the iPhone 4S is a huge disappointment, less than 1 in 20 will even attempt a coherent defense of that position.

“All right, the camera meets or exceeds anything else on the market in a phone, as does the CPU. Yes, iMessage beats BBM, and has nothing directly comparable on any other platform. Sure, it’s actually a ‘world’ phone now, and it has HSDPA data speeds. Yeah, iOS 5 addresses complaints with notifications and a lot more. Okay, iCloud isn’t quite like any other syncing solution and it could be a really big deal, and the cloud-based iTunes is—no matter what you may think of iTunes—a killer media manager. And sure, we’ll have to see how Siri works in practice, but up until now voice control has meant sitting in your car repeating ‘Dial Martha’ over and over in slow, mounting frustration—if Siri does what it’s supposed to, it’s operating on a level we haven’t seen before outside of sci-fi movies.

“So all in all, we have to conclude this was quite a disappointment.”

I’m going to hold off on any iPhone 5 predictions until tomorrow afternoon. That’s okay, right? I’m pretty sure I’ll have ‘em ready by one or two PM Pacfiic.

Okay, one actual but tentative prediction: while I wouldn’t bet more money than the current list price of a Taco Supreme, I’m going to go against the seeming consensus and be unsurprised if there are two models announced. I also expect that one of those phones—or the phone, if there’s just one—will be more than an incremental upgrade: it may or may not be as big as the leap from the 3GS to the 4, but it’ll be bigger than the leap from the 3G to the 3GS. This isn’t based on anything more than a sense of timing; by bumping the iPhone announcement to October from June, the stakes are raised. Apple always wants to be able to make a plausible case that they’re ahead of the pack out of the starting gate.

(Of course, they may (again) be relying on software to be a bigger differentiation from the competition than hardware, and as John Gruber has pointed out, the iPhone 4 is the best-selling smartphone in the history of the industry and continues to be the top-selling model even now, 16 months after its release. It’s not like Apple is under tremendous pressure to reinvent the line.)