Thursday, January 26, 2012

The Brave New World of Advertising: Back to DLD Edition

I once again had the honor of being invited to the DLD conference. I guess no one read my post from last year. In case you are curious, my hotel was better. . . well, better is a complicated concept. There is no weather pattern over my bed, but of course there would not be as heat rises and tends to collect in the attic - or as they call it here, room 504. It may not really be the attic. I only call it that because the elevator stops on the fourth floor and I had to exit the warm portion of the building and walk up the wooden staircase to the fifth floor to get into a room with a slanted ceiling and a dormer window. My client picked the hotel and did warn me it was not the caliber of the one I stayed in last year. But with the frostbite wound earned in my five star hotel room last year still visible on the little toe of my left foot, I figured it could not be worse. The VC's behind this startup are certainly very proud of the selection, it reinforced my belief that I am too old to be a startup. It was not until I was here that I learned the English translation of the name of the hotel's street is probably "Street where women take their clothes off and dance on tables for money" or perhaps "place where people can display their ability to make arabic signs and hang them in between sex shops." This a stark contrast from last year which looked like it was designed by the level designers from Wolfenstein.
Like many other European hotels and gas station bathrooms along Route 66 in the United States, the room key has a very large attachment to remind me to leave it at the desk before I leave. Unlike other European hotels, the front door of the hotel is locked at 9 in the evening and because the key for the side door is also attached the brass and fringed fixture so I was instructed to carry the apparatus which was roughly the size of a small child, with me all day. So to answer those who were thinking it but afraid to ask, I was indeed excited to see you, but it was actually a key to room 504 at the Hotel Deutsches Theater in my pocket.

The conference itself is great. It is very much like going to TED or EG, if half of the people spoke a different language. The interesting part is that it is not always the same part. A healthy slice of Americans are thrown in for flavor with a smattering of Indians and people from other parts of the world, the conference is predominantly German and Isreali. So at any one time, a good chunk of the people milling about during the break choose to speak either German or Hebrew. As a patriotic American, I chose to speak neither. The language differences afford a very effective brush off ability. Rather than the usual "Hey, I'll be here all three days, let's catch up later." Someone who does not want to talk to me can just give me a blank look with raised palms in an "I don't speak English" kind of way. Fortunately, the panels remain entirely in English and most of them do not sound like an episode of Sprockets. Once again, there were big names and big ideas. There is not another place on earth where Jack Dorsey, Freeman Dyson and Yoko Ono would be on the same schedule. I am not going to go into it because you can read better coverage at sites like Wired, the WSJ, All Things D or by doing whatever it is you do with the hashtag DLD, or see it streaming by searching DLD 2012. But one panel stood out in my mind not for what was discussed, but for the elephant sitting in the room that was not discussed.

The panel was called "New Studios" and was made up of Danny Zapin of Maker Studios, Jesse Draper of The Valley Girl Show, Yoel Flan of The Shine Group , and Mark Read of WPP. It was a mixup of old school money with new school content. Maker Studios built tens of millions of subscriptions on the web and Jesse Draper built a syndication network across the web and physical locations that reaches several million. The role of the industrialist was played by Yoel Flann who is aggregating shows and Mark Read played the role of status quo proponent. Mr. Read pointed out, quite correctly, that television is not going away. In fact the markets are growing dramatically in BRIC countries. He explained how CES was dominated by screens. Big screens, small screens, in between screens. My favorite line was in response to my question when he channeled Dr. Seuss with "in the future we will see four screens maybe more screens." What Mr. Read failed to address is how the content is going to get to the screens. Even though all those screens look the same from the front, they are very, very different from the back. They are all IP addressable. This means people who already use DVRs to allow them to care very little about which network is broadcasting a show, will soon care very little about whether there show is being broadcast by a network, cable operator or website. Great news for everybody sitting to the left of Mr. Read, but in a Darwinian way, not so good for him. According to WPP's last publicly available annual report the revenue for all of the advertising agencies within the group was right around one half the revenue of the media management group. The profit of the agency is driven by the high margin media buying business. A cynic would also point to the reduced accountability of buying a Super Bowl ad with Neilson reported numbers relative to seeing actual click through from a web campaign. Mr. Read cannot buy up inventory from the others on the stage because it is simply too expensive. The cheaper the ad buy the more expensive the dollar being spent. So what happens moving forward?

From the consumer side we know we will see one screen, and depending who you listen to, we will talk, gesture, dance or sing to find the show we want to see. From a personal perspective I can tell you my son really does not care whether the latest episode of Top Gear comes in from BBCA on our cable system or through the mac mini plugged into the television. The only thing he knows is he sees it six months sooner streaming on the web. But from a sponsor perspective things become very convoluted. Today, on buy goes into one box. If I want television I use television metrics and I buy from one party via one set of rules. Prices vary between network and basic cable (with some basic cable shows drawing more than network there is no logic, but it still works this way) but it is all basically the same. If I buy web I use a completely different set of metrics and a completely different rule set. But what will it look like when I have the choice between 1.5 million eyeballs I think are watching the Daily Show on Comedy Central at 11 p.m. and a guaranty of delivery 1.5 million eyeballs to my product in the same time period through the very same screen? Especially when the latter is significantly cheaper than the former. The decision becomes easy and the argument that "network will always be network" becomes even weaker than it is today relative to cable. The decision becomes easy and the argument that "network will always be network" becomes even weaker than it is today relative to cable.  There is an old line attributed to everyone from Henry Ford to John Wannamaker that half of all advertising dollars are wasted, but we don't know which half.   Well, now we do. The only question becomes "what happens to those companies who make the lion's share of their profit from selling both halves?"

Monday, January 2, 2012

Amazon's Special Gift to Steve Jobs: Android's Success is the Biggest Threat to Android's Future Edition

By now I am sure Walter Isaacson's report of Steve Jobs feelings about Android is news to no one. At one point during the interviews leading up to the greatest retelling of the monomyth since Luke Skywalker, Jobs said:

I will spend my last dying breath if I need to, and I will spend every penny of Apple's $40bn in the bank, to right this wrong," . . . . I'm going to destroy Android, because it's a stolen product. I'm willing to go thermonuclear war on this.

The timing of that last breath relative to the life of Android is also news to no one. What I have not seen is the realization that Google may have stolen the frame, but Amazon stole the art. And while the media continues to report on the Amazon vs. Apple battle for the bedtime and reclining market, the real battle is Amazon vs. Google. The success of Amazon’s Android running Kindle Fire and focus on the Apple battle masks Amazon’s role as the new standard bearer in Steve Jobs’ war against Google which may well have cause Google to be hoist with its own petard.

Apple never hid its focus on what products can do, rather than providing tech specs. In fact, from the day he returned to Apple, Jobs talked about it to anyone who would listen. The message was clear in the first iMac commercial telling people they were two steps away from getting on the Internet,

At the same time, Dell, the world's largest computer maker, Dell, was running a commercial showing an astronaut floating in space. Twelve years later, Palm still didn’t get it when they launched an iPhone competitor by showing people dancing in a field,

and Motorola was no better with their iPhone killer introduction looking more like a teaser for a Michael Bay film than a phone.

Jobs vision for Apple was not at all curious, but it was certainly curious that no other technology company copied him - until now - and Amazon copied it all.
Apple did a ton of things right to make the iPad work, but the most important was ensuring the quality of the user experience by building and guarding its own ecosystem. Unlike Google, Apple makes sure there was only one type of hardware, running one flavor OS. Then it built a wall around its beautiful garden.

Ensuring the user experience is so important, Apple takes great steps to protect its garden from the detritus left by foreign bodies. It entered into license agreements for distribution of broad swaths of content and committed to review and approve every single piece of software introduced into the garden and even acquired an ad service to make sure the commercials inside the products accepted into the garden would be up to Apple standards. The result, is the single largest homogenous technology base in the industry. Oh yeah - one more thing – Apple has everyone's credit card number.

Amazon was hitting its stride at the time Steve Jobs returned to Apple, and Jeff Bezos also knew success depends on customer service. The company started to provide customer service when it was easy. It only had to deliver the right product on time, and have a customer support phone number. Just like Apple’s simply providing a computer that worked, Bezos simply gave customers what they ordered. At the time, both concepts were revolutionary. Like Steve Jobs, Jeff Bezos did not stop after the easy parts. Just as Jobs famously made sure the parts of the products on the inside are as beautiful as the outside, Bezos invested vast amounts into building unseen technology to magically enhance the user experience – even in ways the consumer never noticed. By doing so, he built a massive user base into a massive company. Oh yeah- one more thing- Amazon has everyone’s credit card number.

Lots of tablets launched last year, but Amazon and Apple were the only ones to launch tablets with clear paths to doing things – and they are the only successful players in the market. It is also no coincidence both tablets are neutered relative to most of the others on the market. Techies think everyone wants to customize and program their shiny little noisemakers, but Apple was the first to identify that just like in video games, the perception of freedom is much more important than freedom itself. Steve Wozniak said it best when I asked him whether he thought the iPhone was a modern version of the Newton (little known bit of trivia – Jonathon Ive designed the Newton 110) and he said
No, the Newton learned you, you learn the iPhone.

Any game designer will tell you that giving a player too much freedom will make them bored. Players must be led in a way they do not know they are being led. That is why Amazon and Apple would make great game designers. While the two companies pursued the same consumer, in the same manner, they attacked the market from completely different directions.

At its very core- no pun intended, - Apple is a hardware company and Amazon is a retailer. This is important because their decisions will be made to maximize revenue in their core businesses.
Some may say Apple is more than hardware, but the company, like Sony used to do and Nike does with shoes, makes its money on selling hardware at higher margins than any other computer company. Jobs always said the software hardware relationship was critical to making the best products, but, for the most part, the software, is not sold on its own and most software businesses within Apple are small relative to hardware sales. In laying the groundwork to launch media devices Apple successfully commoditized music, television, film and game content and gave it to the consumer, so the company could make its profits on the hardware. Jobs compared the company to BMW and if you look at the product lives and update cycles, they are not dissimilar. “I am going to sell you the greatest thing the world has ever seen, and then I am going to show you why it is inferior to my new greatest thing the world has ever seen.”

Amazon is a software company and it is slowly but surely turning its retail products into software. Unlike Apple, hardware only exists to facilitate the software transactions. The company built more software than any other retailer on the planet, but like Apple they don’t sell it. All of the coding goes into an invisible infrastructure with a public appearance that is charitably described as "dated" – but in the case of Amazon this is its strength, not a weakness. With many, if not most of the same content relationships as Apple, the company sells streams as well as downloads. However, Amazon makes its money on the content sales. The company looked to its first hardware device years ago as a lost leader to enable increased engagement with consumers, and higher margins on content sales. In determining what people want in a device, Apple found people did not always need the power of a computer. So it looked at computers, pared them down to the most common uses, put them on a tablet and sold them at a great margin. Amazon realized people did not need all of the expensive stuff built into an iPad, so it pared its tablet down to the most common uses, and priced it slightly below cost. In doing so, Amazon commoditized the tablet. Amazon did not steal the concept of selling digital media into their own hardware, and the first Kindle actually launched well before the iPad. But it did steal, the concept of content over hardware. Every other company was trying to make a better table than Apple, and some did. Amazon was the first to realize they could launch a worse tablet, so long as consumers were able to easily do the things they like most. Choices are limited, but they are limited to what people want. They want this stuff so much, they bought a million Kindle Fires a week. This story plays out like John Woo directed it. Apple is underpricing Amazon on the content, while Amazon is underpricing Apple on the hardware – unless you look just out of frame at the bigger gun Amazon is pointing at Google.

If you are reading these words, you just spent a whole bunch of time reading gaseous belch about why content and access to content are more important than hardware in the tablet world but nothing about Amazon fighting Google. This is where it all comes together. The consumer only cares about content and the providers and creators of content care about getting paid for content. Payment depends on the size of the installed based and the ability to settle a transaction. Because there is no single source of content and Google is still asking nicely for people to put their credit card data into a Google Wallet, no one really gets paid for selling content on Android. The only money made, even on apps like Angry Birds, is through advertising – and for obvious reasons, Google is just fine with that. But before a content provider decides to release an application for free and support it long enough to grow a base large enough to generate significant revenue, it has to run on Android. Therein lies the rub.

Unlike Apple with its single OS and device, Android has a variety of flavors and devices and they are not all the same. Deployment on Android reminds many of the bad old days of PC development because applications must be tested across many platforms and configurations. Kindle Fire to the rescue. By building the Kindle Fire on a customized layer of Android version 2.3, (Gingerbread) and then selling it to 14 million people, Amazon created the second largest homogenous base of users in the tablet world and by far the largest homogenous base of Android users and the only one with a built in payment method. This should be a big win for Google. Just like IBM carried Microsoft's OS to the world like a virulent, pestilent disease, the Kindle Fire is spreading Android over iOS and finally making it worthwhile for developers to invest time in apps. Right? Not really. Amazon is giving consumers a better reason to shun the higher functioning, newer, pricier Google Android devices in favor of the neutered, smaller tablet running a two generation old OS. All in all, this turns into a big plus for Apple. Apple will continue to make BMW's and Amazon will make Chevy's. The market needs both. A Chevy does what a BMW does - gets you from home to work and back again with the occasional trip to see a movie - and for its real world uses, performance is identical. But people buy BMWs for a few added bells and whistles and all those things they will never do with the car, but can. And of course the prestige associated with telling the world you paid more for your car than a comparable Chevy.

I could argue Amazon is killing Android, but it is not. Google is killing Android. Even though Google is touting the virtues of Android 4.0 (Ice Cream Sandwich), it continues down the same path as earlier versions. Specifically, it will not run on all prior hardware devices, it is will not be universally deployed, and it will be operating on a number disparate hardware platforms. No matter how much Google says it is the same, the hardware will cause variation in performance that impacts the applications. The decision for content providers looking at developing for a disparate base with no payment method vs developing for a large homogenous Kindle Fire base with a built in payment method and promotional channel is very easy.

Begging the question, without the quality applications, can Google grow 4.0 as quickly or successfully as Amazon grows the Kindle Fire? With Kindle serving as a gateway drug to iPad's and slowing Google's march, I have to think Steve Jobs is smiling somewhere.