Uber, Airbnb vs Cartels and Regulators

 

Disruptive models for transportation or accommodations are perfect illustrations for the gap between friction-free, agile new models and the cohort of status quo defenders. For their part, regulators, lost as they are in digital translation, are worse than powerless. (Part of an series on Disruptors)  

Last week, a member of the French Parliament released a long-awaited report addressing the fight between taxi-cabs and digital-era car services such as Uber. In the meantime, the new socialist mayor of Paris, Anne Hidalgo, is training her guns on Airbnb, the acclaimed lodging system that is making a killing in the capital.

Not all the disruptors are Ugly Americans, though. Local startups take advantage of an unfortunate side of French culture – bad service at high prices – to put a dent in established markets. To name but a few: Drivy, a car rental system between individual, offers a inexpensive service available 24/7 (most French car rental agencies in Paris downtown are closed on Sundays) and, thanks to the backing of the German insurer Allianz, the company has the resources to grow; similarly, TripnDrive offers free airport parking if you make your car available for rental (of course you get paid if the car is actually rented), again with the backing of a major insurer.

What’s going on in Europe is interesting. Let’s focus on Uber (a serious knee injury made me an assiduous customer of Uber and drivers gave me lots of details about their economics). The office of the Prime Minister commissioned a report after last January’s violent protests by registered cabs who blocked airports accesses and attacked some Uber cars. In France, every government from right to left, has a solid track record of yielding to street protests, which explains why the country is so immune to structural reforms such as the ones implemented in Canada or Sweden. To the PM’s credit, hearings where thorough and the report (PDF here in French) provides a detailed view of the situation. To make it short, city cabs are artificially limited to 17,636 cars for the Greater Paris, thanks to a license system that cost around €200,000 in Paris (€300,000 in Nice or Cannes; in New York a medallion can fetch $1 million). Such malthusian, lobby-driven policies lead to poor supply: Only 3 cabs for 1000 inhabitants in Paris, vs. 13,5 in NYC, 11 in London, 8 in San Francisco, 7 in Seoul, etc.

Practically, a Paris cab driver willing to work as an independent (as many do) must cough up close to €300,000 ($415,000) — that will include the mandatory license, the car, equipment, affiliation to a dispatching system, insurance —  before earning a single euro. Should h/she should choose to lease a taxi, the cost will be €4500 per month for the whole setup. No wonder why taxi drivers are jealously defending their expensive turf.

On the service side, it’s not a pretty sight: filthy cars, credit cards not accepted, beware if you don’t tip, rough manners (like in a bistro, clients are always a pain), endless tales of foreigners overcharged, no cars in sight when it rains, if you book it, expect an “approach fee” of €10-15 (plus €7 minimum fee, plus $35 per hour of waiting time or traffic jam), you’re expected have change on you, etc.  I feel bad conveying such a picture, but that is exactly the situation.

Needless to say, this left a wide open field to Uber-like systems that offer all the agility of modern digital services. Based on multiple interviews I made during my daily trips:
– Drivers are much younger than regular taxi drivers; the oldest ones are former cab drivers who hastily sold their beloved license before it depreciates.
– Above all, they enjoy the freedom of working whenever they want (especially when the demand is high) and the simplicity of the whole process.
– Most want to develop a business around it (some share a sedan with an associate and develop their own clientèle).
– The entry price is much lower. No license needed to operate, and if the driver cannot or will not invest, rental is much cheaper: €2,000/month max, versus €4,500 for a registered cab.
– A swift and friction-free system for booking and paying (no-money exchange with the driver).
– Greater security for the driver who doesn’t carry cash and whose customers are duly identified in the system.

The French government’s response? Restriction and demagoguery. After the cabs’ violent outburst, the administration decided to freeze car service registrations. Today, the report’s authors are willing to constrain Uber’s development.

For instance, it recommends to forbid what it calls “digital hailing”, i.e, the ability to visualize on the app the nearest cab and hiring it, like here:

uber-geol

This possibility of visual geolocation would be left exclusively to registered cabs (although none of them use any app). Uber and its likes would be restricted to advanced reservation — which turns to be a fine line: Uber’s geolocation system is powered by FourSquare’s database of various places. Practically it means booking a Uber car from the Café de Flore  by name is fine, but I can’t use the street address of the place. The parliamentary report is filled with such nonsense and betrays a deliberate disregard for the user perspective (a notion not even mentioned in the opus.)

Legislators and lobbies are missing a key point here. What users enjoy the most with services like Uber or Airbnb are two things:

(a) The lightness and the reliability of the intermediation : an app acts as a trusted third party that, in addition, will smartly address the supply and demand issue. As an example, next month, Uber is going to dispatch more than 100 of its best limo drivers for the Cannes Film Festival to address the surge in demand (apparently, there is so much work on the Croisette that local cabs are willing to tolerate the newcomers.)

(b) The frictionless and robust transaction system: The cell phone is the sole payment vector in the case of Uber, and Airbnb is acting as an escrow agent that guarantees the transaction for both parties.

By and large, the European resistance to the digital modernization of commercial services is driven by two concurrent ideological postures: defense of well-established, well-identified leagues — and strong anti-americanism.

In Brussels, on April 15th, a court order issued a straightforward ban of application-powered car services such as Uber, triggering the anger of the European commissioner for digital policies Neelie Kroes (see also her adamant blog post):

As for the socialist French MP, while his report leans only softly in favor of the old-fashion cab system that no French government wants to upset, its own website clearly expresses his personal bias again what he calls “Uber’s Cow-boy behavior” (always the long-standing cliché) and the fact that Google is behind the service.

Disruptive models are growing like weeds. Everywhere.

Next week, we’ll explore four critical issues:

1. The long term macroeconomic impact of disruptors, once they’ll have percolated in almost every sectors; how to deal with heavily funded players (Uber and Airbnb are valued at $3.5bn and $10bn respectively, and the fact they are not willing to pay taxes in their local markets).

2. The social impact for the new breed of workers who enthusiastically — sometimes naively — embrace such newcomers.

3.  The cascading effects of disruptors that will call for a modernization of many connected sectors (e.g. all sorts insurances, funding systems) and the underlying factors that pave the way for earthquake-like disruptions.

4. The upcoming transformation of industry lobbies and its political impact.

This is just the beginning of the story.

frederic.filloux@mondaynote.com

Science Fiction: Mining My Own Exhaust

 

A few thoughts on Big Data, self-knowledge, and my hopes for the emergence of a new genre of services.

I’m about to fulfill an old fantasy — the Great American Road Trip. Over the next three weeks, we’ll be driving all the way from Key West, FL to Palo Alto. In that spirit, today I’ll luxuriate in another, more distant reverie: Mining my own data exhaust.

I’m spurred to this indulgence by the words of Satya Nadella, Microsoft’s new CEO, at an April 15th event in San Francisco [emphasis mine]:

“The core evolution of silicon, software and hardware is putting computing everywhere humans are present,” Nadella said. “And it’s generating a massive data exhaust of server logs, sensor data and unstructured social stream information. We can use that exhaust to create ambient intelligence for our users.”

Nadella’s right. I leave a cloud of data exhaust with my Web browsing, credit card purchases, cell phone use, monthly blood tests, pharmacy purchases, and airline trips. Server logs detail the length and breadth of my social interactions on Facebook and Google+… And I don’t have to be on a computer to add to the cloud: I’m tracked by toll passes and license plate snapshots as I drive my car. The car itself monitors my driving habits with its black box recording of my speed and direction. This list, far from exhaustive [no pun intended], is sobering – or exciting, full of possibilities.

Today, we’ll skip the Orwellian paranoia and fantasize about an alternate universe where I can “turn the gratis around”, where I can buy my data back.

Google, Facebook, and the like provide their services for free to induce us to lead them to the mother lode: Our cache of product preferences, search history, and web habits. They forge magic ingots from our personal data, sell the bullion to advertisers, and thus fuel the server farms that mine even more data. I’m not here to throw a monkey wrench into this business model; au contraire, I offer a modest source of additional revenues: I’d like to buy my data back. And I’ll extend that offer to any and all entities that mine my activities: For you, at a special price today, I’m buying my data.

(We all understand that this fantasy must take place in an alternate universe. If our legislators and regulators were beholden to us and not to Google, Verizon, and “Concast” [a willful typo from Twitter wags], they would have long ago made it mandatory that companies provide us with our own data exhaust.)

Pursuing this train of thought, one can conceive of brokers scouring the world for my exhausts — after having secured the right permissions from me, of course. Once this becomes an established activity, no particular feat of imagination is required to see the emergence of Big Data processing companies capable of merging and massaging the disparate flumes obtained from cell carriers, e-merchants, search engines, financial services and other service providers.

So far, especially because it lacks numbers and other annoying implementation details, the theory sounds nice. But to what end?

The impulse can be viewed as a version of the old Delphic injunction: Know Thyself, now updated as Know Thine Quantified Self: Quantify what I do with my body, time, money, relationships, traveling, reading, corresponding, driving, eating… From there, many derivations come to mind, such as probabilistic diagnoses about my health, financial situation, career, and marriage. Or I could put my data in turnaround, mandate a broker to shop facets of my refined profile to the top agencies.

Even if we set aside mounds of unresolved implementation details, objections arise. A key member of my family pointedly asks how much do we really want to know about ourselves?

This reminds me of a conversation I once had with a politely cynical Parisian tailor. I ventured that he could help his customers choose a suit by snapping a picture and displaying it on a 80” flat screen TV in portrait mode. My idea was that the large scale digital picture would offer a much more realistic, a more objective image than does a look in the mirror. The customer would be able to see himself as others see him, what effect the new suit would produce – which, after all, is the point of new duds.

“No way,” said the Parisian fashionista, “are you nuts? My customers, you included,” he tartly added, “really don’t want the cruel truth about their aging bodies…”

Still, I’m curious. And not just about the shape and color of the data exhaust that I leave in my wake, about the truths — pleasant or embarrassing — that might be revealed. I’m curious about the types of companies, services, and business models that would emerge from this arrangement. Even more fascinating: How would the ability to mine and sell our own data affect our cultural vocabulary and social genetics?

JLG@mondaynote.com

PS: As offered here, I recently downloaded my Facebook data set. The data doesn’t appear to be very revealing, but that could be the result of my low Facebook involvement — I’m not a very active user. I’d be curious to see the size and detail level associated with a more involved participant.

PPS: I’ll be on the road, literally, for the next three weeks and may or may not be able to post during that time.

The iPad Is a Tease

 

As Apple is about to release its latest quarterly numbers, new questions arise about the iPad’s “anemic” growth. The answer is simple – but the remedies are not.

The iPad isn’t growing anymore. What happened? 

In anticipation of Apple’s latest quarterly numbers – they’ll be announced on April 23rd – the usual prerelease estimates swirl around the Web. You can find Yahoo’s summary of analysts’ estimates here; Paul Leitao’s Posts At Eventide provides a detailed and tightly reasoned history and forecast for the March 2014 quarter.

The consensus is that for the company as a whole, there won’t be any surprises: Apple will meet the guidance stated in its January 27th earnings call. Revenue will be down, as befits the quarter following the Christmas shopping frenzy, but profit per share (EPS) will be up a bit.

Boring. With one glaring exception:

Braeburn Group iPad Edited
(Source: The Braeburn Group)

In the same quarter for 2013, the iPad’s year-on-year growth was about 55%. Some of this phenomenal growth was due to a rebound from earlier iPad mini supply constraints, but that doesn’t explain the precipitous drop from 2013 to this year.

Are the iPad’s go-go years over?

As Philip Elmer-DeWitt reports on his Apple 2.0 site, this gloomy prediction appears to be the majority opinion among analysts. Elmer-DeWitt acknowledges that there are outliers — Horace Dediu comes in at the high end with an estimate of 21.8M units (and positive growth) — but “the consensus estimate of 19.3 million, would represent a 0.7% decline”.

It’s one thing for a product to increase in unit volume sales but still grow less than the overall market — that’s simply a loss of market share. And we know how fallacious share numbers can be in the absence of an honest disclosure of sales volumes. No, assuming the estimates are right, what we have here isn’t market share dilution, it isn’t a post-Christmas lull, it’s a year-to-year decline in absolute unit numbers.

Why?

I’ll offer an opinion: The iPad is a tease. Its meteoric debut raised expectations that it can’t currently meet.

To explain, let’s go back four years.

Steve Jobs’ last creation took us by surprise, price included, and was initially panned by many in the kommentariat, from Eric Schmidt to Dan Lyons (who subsequently recanted). But normal humans joyously took to the iPad. In 1984, one of Apple’s tag line for the Mac was “Macintosh – the computer for the rest of us.” Decades later, the iPad was quickly perceived as a sort of second coming. As MacWorld put it in June 2011: Now Apple’s really “for the rest of us”.

Indeed, the iPad wasn’t targeted at a particular type — or generation — of user. David Hockney has produced exquisite iPad “paintings”. Daniel Borel, Logitech’s co-founder, told me that his two-year old grandson immediately “got” the iPad (even if it was just to play games, but…he’s two). Coming out of our breakfast meeting, I crossed paths with a couple of seniors — octogenarians, probably — who proudly told me that they were going to an iPad training session at the Palo Alto Apple Store.

The iPad rose and rose. It won legions of admirers because of its simplicity: No windows (no pun), no file system, no cursor keys (memories of the first Mac). Liberated from these old-style personal computer ways, the iPad cannibalized PC sales and came to be perceived as the exemplar Post-PC device.

But that truly blissful simplicity exacts a high price. I recall my first-day disappointment when I went home and tried to write a Monday Note on my new iPad. It’s difficult — impossible, really — to create a real-life composite document, one that combines graphics, spreadsheet data, rich text from several sources and hyperlinks. For such tasks, the Rest of Us have to go back to our PCs and Macs.

I realize there are iPad users who happily perform “productivity tasks” on their iPads. Most of them use a stand and keyboard sold in a number of guises. The number of different offerings is a testament to a real need. (We’ll note that Apple doesn’t seem eager to address this issue directly. They don’t offer an “iPad-sized” keyboard — the Bluetooth keyboard I use is fine for my iMac, but feels gargantuan when I pair it with my iPad. And Apple’s iPad Dock hasn’t been updated to work with the “Lightning” connector on the newer iPads.)

The iPad’s limitations extend beyond classic office productivity tasks. I just tried to build an itinerary for a long postponed road trip, driving all the way from Key West Florida to Palo Alto. On a Mac, you can easily “print to PDF” to produce a map for each leg of the trip. Then you use the wonderful Preview app (I salute its author and dedicated maintainer) to emend unneeded pages, drag and drop, combine and rearrange the PDF files into a single document. Don’t try this on an iPad: How would you “print-to-PDF” a map page, let alone combine such pages?

Despite the inspiring ads, Apple’s hopes for the iPad overshot what the product can actually deliver. Although there’s a large numbers of iPad-only users, there’s also a substantial population of dual-use customers for whom both tablets and conventional PCs are now part of daily life.

I see the lull in iPad sales as a coming down to reality after unrealistic expectations, a realization that iPads aren’t as ready to replace PCs as many initially hoped.

In his introduction of the iPad in January, 2010, Jobs himself seemed a bit tentative when positioning his latest creation. Sitting in the Le Corbusier chair, Jobs stated that his new tablet would have to “find its place between the iPhone and the Mac”.

This “in-between place” is still elusive.

Microsoft tried to find that “in-between place”, and we know how well that worked. For the Redmond company, the iPad’s limitations were an opportunity: Simply emulate the charm and intuitiveness of the market-leading tablet and cater to the needs of the “professional” user. With its touch interface and keyboard, the Surface device sounded like the solution that had eluded Microsoft’s earlier PC Tablets. In the field, customers didn’t like the dueling interfaces, nor the introduction of layers of complexity where simplicity had been promised. Surface tablets didn’t move the revenue needle and cost Microsoft a $900M write-down.

The iPad represents about 20% of Apple’s revenue; allowing iPad numbers to plummet isn’t acceptable. So far, Apple’s bet has been to keep the iPad simple, rigidly so perhaps, rather than creating a neither-nor product: No longer charmingly simple, but not powerful enough for real productivity tasks. But if the iPad wants to cannibalize more of the PC market, it will have to remove a few walls.

Specifically, the iPad is a computer, it has a file system, directories, and the like — why hide these “details” from users? Why prevent us from hunting around for the bits and bobs we need to assemble a brochure or a trip itinerary?

None of this is news to Apple execs, but they also know that success doesn’t depend on What, on a simple feature list. The next step in iPad growth will depend on How new features are integrated into the user experience. It’s a tricky game of the Best of Both Worlds…and it tripped up Microsoft.

When will we know? I have no idea. Perhaps at the WWDC this coming June.

JLG@mondaynote.com

Religion is a safer bet than Facebook

 

Facebook’s incredible global reach and success appear to forestall challenges. In the long run, though, the social network’s growth and its frantic quest for new revenue sources raise questions. (First of two articles)    

Casting doubt on Facebook’s future is like going to Rome and questioning the existence of God. It’s not the right venue to do so. First, you can’t argue with figures, they’re overwhelming. Each institution features about the same number of devotees: 1.2 billion across the world. As for financials, Facebook’s annual report shows strong growth and wealth: $7.8bn in revenue for 2013 (+ 55% vs 2012), net income at $1.5bn and a $11bn cash pile. As for the Catholic Church, since it doesn’t not issue financial statements, we are left to guesstimates. Two years ago, a story in the Economist provided a back-of-the-envelope calculation putting the operating budget of the American Catholic Church alone to $170bn, the bulk being health and educational institutions, with $11bn for parishes where hardcore users are – which, for that part, is much better than Facebook.

Why, then, question Facebook’s future? Mainly for two reasons: ARPU evolution and diversification.

Let’s look at a few metrics. The most spectacular is the Monthly Active Users (MAUs) base: 1.23 billion people for the entire world. An interesting way to look at that number is to break down the global MAUs into geographic zones and combine those with ARPU numbers (calculated from the quarterly figures stated in the annual report). The results look like this:

316_facebook_arpu

Facebook’s long term challenge comes from these two factors: North American growth will be flat this year, and the rest of the world doesn’t bring much. The company is heavily and increasingly dependent on advertising: from 85% of its revenue in 2012 to 89% last year. Logically, its only option is to squeeze more money per user — which it steadily managed to do thus far. But, in the Facebook ecosystem, making more money from ads means milking more cash from users’ data. This, in turn, will lead to a greater invasion of privacy. It certainly doesn’t seem to bother Mark Zuckerberg, who is a transparency apologist.

Actually: Is he or was he?

As author David Kirkpatrick pointed out in his excellent opus, The Facebook Effect, Zuckerberg once said that “Having two identities for yourself is an example of a lack of integrity” (and judging by FB’s content policy, anyone can wonder if putting a breast-feeding pictures a sign of depravation?)

That was then.

Now, to address privacy concerns, Facebook is said to consider anonymous logins. It’s probably a good idea to back off a bit on the totalitarian pitch quoted above, but since the extensive data-mining performed by the network is made much more valuable by its use of real user names, anonymous logins are sure to impact the ARPU in the more mature markets. Along that line of thought, in Europe, Facebook’s ARPU is less than half of what it is in the US & Canada: $8.04 vs. $18.70. This significantly lower number stems from privacy concerns that are much more developed in European countries. There, the 20-25 segment seems especially worried about the consequences of spending too much time on Facebook.

A remaining lever is what I’ll call the Big Tobacco strategy: Do elsewhere what you can no longer do on your home playing field. Facebook might not be as cynical as Philip Morris (reborn as Altria as an attempt to erase the stain), but it is undoubtedly bound to try and replicate its successful collect-and-milk consumer data mechanism.

This might take a while to achieve.

First because of the ultra-slim ARPU generated by emerging markets users. You might object that the Indian market, as an example, currently enjoys growth along two dimensions: more users, with growing incomes. Granted. But the more sophisticated the India market becomes, the more inclined it will be to create a social network much more attuned to its own culture than a Menlo Park-based system manned by geeks in hoodies. Never underestimate the power, nor the determination of locals. And, let’s not dream too much about a huge Chinese version of Facebook.

Also, for Facebook, the cost of operating its service will make the ARPU question one of growing urgency. Again, based on the 2013 annual report, FB’s Cost of Revenue — mostly infrastructure —  amounts to $1.9bn. Divided by the 757 million DAUs, it costs $2.5 per year to serve a single daily user, that is connecting to his/er pals, hosting photos, videos, etc. If we aggregate all the cost structure components (networking, giant data centers and also R&D, sales & marketing, administrative), the cost of taking care of a single daily user rise to $6.69 per year and $4.12 for a monthly user. It’s still fine for an American and a European, much less so for an Asian who brings a yearly ARPU of $3.15, or an African who brings a mere $2.64 (in theory, the strain on the infrastructure is roughly the same, regardless of user location).

But some will argue Facebook is doing quite well on mobile. Out of its 1.23 billion monthly users, FB says 945 million reach its service via a mobile each month and 556 million do so on a daily basis. And, as stated in its 10-K, mobile is at the core of Facebook’s future:

There are more than 1.5 billion internet users on personal computers, and more than three billion mobile users worldwide according to GSMA Wireless Intelligence, and we aspire to someday connect all of these people. 

Fine, but once again, the ARPU weakens the ambition. While a mobile subscriber in the US and Europe brings respectively $69 and $38 each year (source: GSMA), according to the Cellular Operator Association of India, a Indian mobile subscriber yields only $1.72 per year. This makes advertising projections a tricky exercise.

As it expands, Facebook’s current model will inevitably yield less and less money per user. Hence, its frenetic quest for diversification and service extensions — a topic we’ll address in a future Monday Note.

As for the Church, it certainly is a safer bet than Facebook: The user base is less volatile, the interface blends much better into local cultures, barriers to competitive entries are stronger (and much older), and believers have long sacrificed their privacy to articles of faith.

frederic.filloux@mondaynote.com

 

The Browser Is The OS: 19 Years Later

 

So it was declared in the early days: Web apps will win over native apps. Why let the facts cloud an appealing theory?

Marc Andreessen, the Netscape co-founder, is credited with many bold, visionary claims such as “Everyone Will Have the Web” (ca. 1992), “Web Businesses Will Live in the Cloud” (1999), “Everything Will Be Social” (2004, four years before joining Facebook’s Board), and “Software Will Eat the World” (2009).

But not all of Andreessen’s predictions are as ringing and relevant. His 1995 proclamation that “The Browser Will Be the Operating System” still reverberates around the Web, despite the elusiveness of the concept.

The idea is that we can rid our computing devices of their bulky, buggy operating systems by running apps in the Cloud and presenting the results in a Web browser. The heavy lifting is performed by muscular servers while our lightweight devices do nothing more than host simple input/output operations. As a result, our devices will become more agile and reliable, they’ll be less expensive to buy and maintain, we’ll never again have to update their software.

The fly in the ointment is the word connected. As Marc Andreessen himself noted in a 2012 Wired interview [emphasis mine]:

[I]f you grant me the very big assumption that at some point we will have ubiquitous, high-speed wireless connectivity, then in time everything will end up back in the web model.

So what do we do until we have ubiquitous, high-speed wireless connectivity?

We must build off-line capabilities into our devices, local programs that provide the ability to format and edit text documents, spreadsheets, and presentations in the absence of a connection to the big App Engines in the Cloud. Easy enough, all you have to do is provide a storage mechanism (a.k.a. a file system), local copies of your Cloud apps, a runtime environment that can host the apps, a local Web server that your Browser can talk to… The inventory of software modules that are needed to run the “Browser OS” in the absence of a connection looks a lot like a conventional operating system… but without a real OS’s expressive power and efficiency.

For expressive power, think of media intensive applications. Photoshop is a good example: It could never work with a browser as the front end, it requires too much bandwidth, the fidelity of the image is too closely tied to the specifics of the display.

With regard to efficiency, consider the constant low-level optimizations required to conserve battery power and provide agile user interaction, none of which can be achieved in a browser plug-in.

Certainly, there are laudable arguments in support of The Browser Is The OS theory. For example: Unified cross-platform development. True, developing an app that will run on a standardized platform decreases development costs, but, let’s think again, do we really want to go for the lowest common denominator? A single standard sounds comfy and economical but it throttles creativity, it discourages the development of apps that take advantage of a device’s specialized hardware.

Similarly, a world without having to update your device because the Cloud always has the latest software is a comforting thought.. but, again, what about when you’re off-line? Also, a growing number of today’s computing devices automatically update themselves.

In any case, the discussion may be moot: The people who pay our salaries — customers — blithely ignore our debates. A recent Flurry Analytics report shows that “Six years into the Mobile Revolution” apps continue to dominate the mobile Web. We spend 86% of our time using apps on our mobile devices and only 14% in our browsers:

Apps 86 Browser 14

…and app use is on the rise, according to the Flurry Analytics forecast for 2014:

Apps Web Flurry 2013 2014

So how did Andreessen get it so wrong, why was his prediction so wide of the mark? It ends up he wasn’t wrong… because he never said “The Browser Will Be the Operating System”. Although it has been chiseled into the tech history tablets, the quote is apocryphal. 

While doing a little bit of research for this Monday Note, I found a 1995 HotWired article, by Chip Bayers, strangely titled “Why Bill Gates Wants to Be the Next Marc Andreessen”. (Given Microsoft’s subsequent misses and Marc Andreessen’s ascendency, perhaps we ought to look for other Chip Bayer prophecies…) The HotWired piece gives us a clear “asked and answered” Andreessen quote [emphasis mine]:

“Does the Web browser become something like an operating system?

No, it becomes a new type of platform. It doesn’t try to do the things an operating system does. Instead of trying to deal with keyboards, mouses, memory, CPUs, and disk drives, it deals with databases and files that people want to secure – transactions and things like that. We’re going to make it possible for people to plug in anything they want.”

Nearly two decades later, we still see stories that sonorously expound “The Browser Is The OS” theory. Just google the phrase and you’ll be rewarded with 275M results such as “10 reasons the browser is becoming the universal OS” or “The Browser Is The New Operating System”. We also see stories that present Google’s Chrome and Chromebooks as the ultimate verification that the prediction has come true.

The Browser Is The OS is a tech meme, an idea that scratches an itch. The nonquote was repeated, gained momentum, and, ultimately, became “Truth”. We’ll be polite and say that the theory is “asymptotically correct”… while we spend more energy figuring out new ways to curate today’s app stores.

JLG@mondaynote.com

Lessons from a good vertical: Skift.com

 

For digital media companies, creating good verticals that breed small but valuable audiences has become essential. On that subject, here are my takeaways following a conversation with Rafat Ali, founder and CEO of Skift.com. In 20 months, Rafat’s company has become a reference in the travel intelligence business. 

There is no excuse for not trying to build a vertical digital service (web site & mobile app) for a strong media company shifting to digital. As long as you have a powerful (not to be confused with profuse) newsroom coupled with a well-structured contents system, trying a foray in a specific domain is worth considering. As an example, see Atlantic Media, one of the most innovative media brands, as it deploys a series of verticals nested in its Government Executive Media Group. These units all generate small but extremely valuable and loyal audiences — and enviable revenue per user (more on the Atlantic in a future Monday Note).

Building a vertical is a mere matter of implementation, you might say. But a look below the surface shows how such process demands much more than merely putting a small group of good writers in a digital stable, and asking them to gather news on a specific subject.

That’s why Skift.com drew my attention. In less than twenty months, manned by only 9 people crammed in an mid-town Manhattan office, Skift.com has become a strong voice and a reference in the travel industry: airlines, booking systems, hotels, tour operators – and all the the sector’s disruptors.

OLYMPUS DIGITAL CAMERA

I met Rafat Ali five years ago in Hyderabad, India; we were both of speaking at the same conference. Rafat was about to exit his first and remarkable startup, PaidContent.org (a terrible name he now laughs off), one of the first blogs decoding the media industry’s transformation. After building it from scratch and spending eight exhausting years producing and editing stories, Rafat sold it to the Guardian for a reported $30m – right before the 2008 crisis. (Last year, PaidContent was acquired by GigaOm).

After a short transition, Rafat was free to go. So did he. In 2010, at the age of 36, he left for a two-year series of trips to Oman, Iceland, Burma, India (where he has family), radiating from his bases in New York and London. At last out of PaidContent’s trenches, he took the time to read a hundred books during his journeys. Following @rafat on Twitter, you could feel his excitement, and also his growing interest in the travel sector.

‘You have to remember, it was 2010, the iPad had just been launched, everyone was thinking about what to build on it’, said Rafat. His first idea was to re-invent the travel guide book for the iPad. But he soon realized how crappy the whole travel industry’s information ecosystem was: ‘I was blown away.’ While the transactional part of the travel business had been completely broken apart by a massive, unprecedented disintermediation — benefiting the customer, trade information remained frozen in the past, with its sets of professional printed publications perpetuating a jargon-filled verbiage offering little or no actionable intelligence, nor useful data

Nature (and digital business) abhors vacuum, so does Rafat Ali, who decided to fill the void. When asked to define Skift in a nutshell, he said this: ‘In late 2011, we wanted to build the Bloomberg News of travel’. (When it comes to business information, this is quite a goal. Never aim low, I can’t agree more.) Rafat’s wanted to build something based on a few concepts: rely heavily on data, capitalize on the open-web, use APIs aggressively (to connect with third party data sets), aim at professionals, consultants, experts, and — last but not the least — prosumers who often know more than merchants. (Read Rafat’s post on the “Mediata” Startups).

The other key to Skift’s concept — which means shift in Danish — was tearing apart the silo culture that plagued the travel industry for decades: ‘You have airlines, airports, cruises, hotels, technology… All of these silos have collapsed in global interconnected megatrends, and we knew we could make our voice heard across all…’, explained Rafat while pointing at this graph:

SkiftCircularGraphic-b
Graph ©
Skift.com

As far as editorial is concerned, Rafat believes journalistic content is needed to create addiction, daily use, while-data related products generate usefulness, stickiness, loyalty and, ultimately, monetization. Content-wise, at the beginning, the site was built on four “legs”: aggregation (collecting headlines); curation (with a tweet-length phrase to describe a story); licensed content (full articles brought from news providers); and originally produced articles. Today, Skift is down to two items: 40% of articles are licensed (mostly Newscred) and 60% are original content — about 15-20 short business stories (produced by a staff of three…)

Business-wise, Skift positioned itself primarily as a B2B company, then secondarily as B2B-2C. Its traffic is still modest (1m UVs/mo), but growing fast; so does its newsletter business, expected to reach 75,000 subscribers by year end. No mobile apps in sight as the mobile web works well for Skift: mobile users account for 35% of web traffic and 50% of newsletters readings.

Skift sells few but high yield ads, to the point that Rafat is about to create a tiny studio to create bespoke brand contents. (Maintaining the mandatory Chinese wall could be tricky in such a small structure.)

But Skift’s true gem is its industry dashboards and data collection system, a well-structured tree that leads to scores of statistics and rankings. Inside, you’ll learn that AirBnB — whose valuation is now higher than Hyatt — has a Skift Score (a combination of indicators) roughly twice the “bookings & tools” industry average. Or that Dutch airline KLM scores way better than the hippest Virgin Atlantic. Or that Hertz masters the social ecosystem way better than the trendy Über.

Using data analytics, Skift produces reports — short and updated twice a month (as opposed to quarterly “bibles” prone to quick obsolescence.) ‘We will focus mainly on marketing, strategy and technology to produce competitive intelligence’, said Skift’s CEO. Rafat’s intense focus on doing few things but doing them well extends to the obligatory conference business: Skift intends to do just a single event about the Future of Travel, in a similar fashion to Quartz’sThe Next Billion conference (see the #qznextbillion hashtag for a list of tweets linking to videos). In both cases, these events are built on strong editorial concepts, ‘We want to make a conference about leadership instead of a vendors-to-vendors type…’ said Rafat.

What’s next for Skift? First, an off-site staff meeting in Iceland. Actually, Rafat Ali is considering a global franchise set in Reykjavik. Less anecdotal, Skift founder wants to apply his news and contents formula beyond the travel industry to what he feels are interconnected sectors — at least in discretionary spending — namely food & beverage and retail sectors.

One final note. Looking at the state of travel information, I can’t help but discern a complete failure of traditional, legacy journalism. Too cozy with the main players and their corrupting PR machines, too filled-up with press junkets and freebies, the mainstream media coverage of this $6.5 trillion/260 million jobs sector has become mostly illegible. This leaves a large open field to new players.

frederic.filloux@mondaynote.com

 

TV Done Right: Still A Dream

 

As the strong reactions to even the slightest Apple TV rumor demonstrate, there’s a vigorous appetite for a simple, modern Internet TV experience. The technology is ready but carriers aren’t.

Last week started with Big Apple TV News in an authoritative-sounding Wall Street Journal article:

“Apple Inc. is in talks with Comcast Corp. about teaming up for a streaming-television service that would use an Apple set-top box and get special treatment on Comcast’s cables to ensure it bypasses congestion on the Web, people familiar with the matter say.”

Search for “Comcast” in a news aggregator such as Feedly (there are many other good choices), and you’ll see a wide range of reactions to the Apple-Comcast rumor. Given the heat the article generated, it’s odd that there has been zero follow-up from the main players — nothing from Apple and Comcast, no additional information in the WSJ or any other journal. When a deal of such importance is in the works, “people familiar with the matter” have a strong incentive to keep talking, to add color, to spin their side of the story. Of course, no one expects Apple to do much leaking, but the radio silence from Comcast spinmeisters is another matter entirely.

Philip Elmer-DeWitt offers the most likely explanation: The Wall Street Journal got played by someone intent on throwing a wrench into Comcast’s plan to acquireTime Warner’s cable operations. (This wouldn’t be the first time: Cellphone carriers have repeatedly used the WSJ to air their perennial Poor Me complaints about excessive smartphone subsidies.)

Echoes of the WSJ non-story ricocheted around the blogosphere. Some, such as this BBC article, make painful points about the abuse that US consumers undergo at the hands of broadband carriers:

Broadband Cost

As a sharp-witted Be engineer liked to remark: “It costs more… But it does less.”

Carriers take too much money for a user-hostile experience simply because they can. In most locations, cable companies have little or no competition, so there’s no reason for them to do anything more than milk the most profit from a cheap infrastructure. As Apple Insider’s Neil Hughes reminds us, the user experience isn’t a priority for cable providers. Indeed, as I write this from Paris, I have to juggle set-top box restarts and malfunctioning secondary content subscriptions only reluctantly allowed by the main provider.

It doesn’t have to be that way. No miracle is required to make our Cable TV experience easy and gratifying.

Consider today’s cable arrangement, simplified for our discussion. A coax cable is strung from the street into your basement or crawl space. You plug the coax into a signal splitter, connect one output to your cable modem for Internet access, while the others feed the TVs in your household.

Next, you run an Ethernet cable from your modem to your WiFi access point and maybe you also run a wire from the access point to your “most trusted” computer. Upstairs, we see a set-top box, an Internet TV streaming device (Roku, Apple TV, Boxee, or other), and, if your TV is of a certain age, a digital adaptor.

That’s four or five devices that you have to connect and, when things go wrong, disconnect, power down, and restart in the “proper” order.

It’s only too easy to imagine how a next-generation Apple TV could collapse this maze of impenetrable interfaces into one box: Coax in, Wifi and HDMI out and, miracle, one and only one remote! This is something that Apple seems to have the taste and resources to do well.

There are no technical obstacles, no new technology is required, no new software platform, just a careful integration job. I realize I’m veering dangerously close to the “mere matter of implementation” deception, but regardless of the amount of work it would take to integrate the various technologies, the benefit to the user would make the engineering effort worth it.

And there are many benefits:  We can throw away our DVRs as content becomes an app that we can stream whenever we want — the 60 Minutes iPad app is an elegant, flexible exemplar of the type. Rather than paying for a “package” of channels that are selected by the cable provider, we’ll be able to buy a la carte shows, series, and channels through iTunes or similar content vendor. We’ll be able to watch the free-with-ads version of a show, or we can pay for the ad-free edition.

Some day, the status quo will break, perhaps as the result of a patient encirclement and infrastructure buildup — a better, vertically integrated Content Delivery Network, both very much compatible with Apple’s playbook. As the reactions to the (possibly planted) Apple-Comcast rumor amply demonstrate, users are becoming increasingly aware of the disconnect between the experience that the cable companies offer and TV Done Right.

JLG@mondaynote.com

Dealing With Data Frenzy

 

Last week, I attended the Newspaper Association of America’s MXC conference in Denver. We were to focus on the publishers’ use of data. A hot topic that sometimes becomes overly broad and leads to unrealistic expectations. Here are some key points I made.   

For any digital publisher, relying on data is no longer an option nor a luxury. It has become a necessity. Each passing quarter confirms the demise of digital advertising: yields continues to fall, programmatic buying (most often operated by large third party players) takes over and continues to fuel deflation. Highly visible media brands — two years ago the Huffington Post, now BuzzFeed — deal with the issue by generating huge quantity of pages saturated with kittens and listicles, each yielding very low CPMs. At the other end of the spectrum, strong media houses develop customized, sophisticated campaigns for high-end brands (see examples on NYT’s IdeaLab page); they also fill their pages and apps with so-called Branded Content items — which very few publishers manage to implement correctly.

For news publishers, the use of data should focus on four goals:
— Increase advertising yields through smarter targeting
— Improve their editorial recommendation engines (hence raising the number of page views per visit)
— Up-sell ancillary products
— Raise the performance of their subscription system (if any.)

Over the recent years, the advertising community managed to find a new gun to shoot itself in the foot. It’s called targeted ads. Everyone has ugly anecdotes about those. Typically, the stories go like this: You do a web search for an item and quickly find it. In the following months you’re deluged by ads for the product you bought. The annoyance prompts many to opt for AdBlocking systems — I did (except for sites I’m in charge of), with no regret nor guilt.

To put it mildly, there is room for improvement, here.

Coming back to profiting from site users’ data, one good example I heard recently is a recent request made by a large airline to the Financial Times: “Find us people who travel on long haul flights and who log on FT.com more than four times per month and from locations scattered along our routes”, i.e. super-frequent flyers used to business or first class, etc. Thanks to IP location analysis yielding geospatial coordinates for each connection, the retrieval of such high-value clientele wasn’t overly complicated. The geolocation principle applies to other requests, such as finding residents of a specific city or suburb, in order to serve effective advertising.

When you think of profiling, use a passport analogy. Anyone who visit a site from a browser (it’s more complicated with mobile apps), is issued a passport in the form of an anonymous cookie, such as this one, injected in my computer by the New York Times:

nyt_cookie

As a digital subscriber, I have inherited no less than 113 cookies from the NYTimes, each one stored in my computer for a specific purpose. They come from every segment of my navigation (pages, sections, articles, blogs), each generates a “stamp” on the passport. The more stamps I get on my passport, the more NYTimes people knows about me. Over time, the process draws a finely defined profile.

The example I often use looks like this (my perspective is from a French business media company):

Based on her past navigation, the user ID:6547dgfc_9088 turned out to be:
– A woman in her 30’s
– Leaving in Toulouse [Thanks to the geolocation of her internet box] She works :
…in the aerospace industry
… most likely in a financial department
… with a special interest in European regulations
… at a fairly high position.
Then we should be able to serve her with:
– Local ads / adjusted for her income and likely tastes [she also visits our lifestyle sections & other online properties in our network] – Adjusted editorial recommendations [related stories] based on her sector and position
– A special deal for our next conference on corporate finance
– A notification when someone in our team or among our partners publishes a book (paper or digital) relevant to her interest
– An abstract of our annual in-depth survey on aerospace
– A sneak-peak at our partner’s COOC (Corporate Open Online Course) featuring four hours of talk by a prominent tax lawyer from Brussels [don't forget the Red Bull] – [And if she's not a subscriber] A promotional, customized, one-time newsletter featuring the economics of commercial airplanes, with past stories from our newsroom, curated links, etc., all of the above driving to the inevitable conclusion: this discerning individual should definitely take advantage of our one-time offer.    

This “internal” profiling can be spectacularly enhanced by working with a major profiling third party. As an example, the large European player Weborama has accumulated a staggering 70 million profiles for an internet population of 52 million French users (each person can be linked to multiple profiles.) All over Europe, Weborama has collected 210 million profiles, roughly 40% of Europeans web users. In our example, by tapping into such large databases, the profile of this upwardly moving female exec from Toulouse will be enhanced up to the minutest detail of her tastes and preferences.

For the media company, reaching such productive interplay between a profiled individual and its ability to serve her with relevant content, services and products requires a well-integrated system — and a critical mass of products.

Understanding someone’s social and semantical genome through internal an external profiling is only a part of the equation. Matching the customer’s profile to the company output (journalism, conferences, publications, surveys…) also demands that the genome of those products be precisely established. If we want to “talk” to the customer’s profile, a story must have its set of tags, keywords and metadata; so does the theme of an upcoming conference that must go beyond a basic presentation, or the description a book. Ideally, every single piece of what the news organization produces must have its semantic genome encoded in a standardized way.

In defining user profiles, media organizations must have a rich and diverse line-up of contents, services and ancillary products. The broader the spectrum of a media brand, the better. All things being equal in terms of editorial quality, an isolated media will be less well armed than a larger company that operates multiple properties ranging from editorial to e-commerce and uses those to construct a wide range of user profiles.

Much more than in print media, isolation is not an attractive option in the digital world.

frederic.filloux@mondaynote.com

Wearables Fever

 

While Google, Motorola, and Samsung seem eager to jump into the wearables market, Apple characteristically keeps its counsel – and wisely so: Smartwatches and other wearables produce more pageviews than profits.

Wearables are a danger to your health – your mental health, that is. Smartwatches and sensor-laden bracelets aren’t so new anymore — see Microsoft’s 2004 SPOT Watch — but the vernal equinox seems to have triggered a bout of Wearables Fever the likes of which we haven’t seen since the Tablet Fever of January, 2011, when 76 tablets were announced at the Consumer Electronic Show in Las Vegas. As so often happens with pandemics, there was a smaller outbreak, called the Dawn of the Tablet PC, days before the January 2010 iPad launch.

In this year’s derangement, we are witnessing the birth of another epoch-making class of product — the Wearable. As Wired sees it, for example, Jawbone Is Now the Startup Apple Should Fear Most.

In one respect, Jawbone’s devices are a lot like Apple’s. The company admires minimalism…[b]ut Apple’s minimalism is cold — all brushed metal and glass — while Jawbone’s is warm, squishy, and textured… There’s a chance Apple has designed itself into a corner. But for Jawbone, the future is full of possibility.

Then there’s this analysis, quoted and mocked by John Gruber [emphasis mine]:

Cadie Thompson, writing for CNBC, “Time Is Ticking for Apple to Announce an iWatch, Say Analysts”. Apple needs an iWatch sooner rather than later, or the company will risk losing its innovative edge to rivals, analysts say.

They only have 60 days left to either come up with something or they will disappear,” said Trip Chowdhry, managing director at Global Equities Research. “It will take years for Apple’s $130 billion in cash to vanish, but it will become an irrelevant company… it will become a zombie, if they don’t come up with an iWatch.

I’m guessing the ellipsis denotes when he paused for another line of coke.

Parenthetically, it would be wrong to imply that Mr. Chowdhry might be “incentivized” to shout from the rooftops by rewards more satisfying than pageviews — no allegations of stock manipulation complicity here — but I wonder about the games that he and other anal-ists play. As Philip Elmer-DeWitt pointedly noted in a CNN Money column last year, Mr. Chowdhry urged his clients to unload Apple stock for eight months and then blamed the CEO and CFO “for destroying Apple’s shareholder value”.

If you’re curious enough to look at Mr. Chowdhry’s spartan Global Equities Research site, you’ll see he claims to have Commission Sharing Agreements with Goldman Sachs, Merrill Lynch, Barclays, Jefferies, Morgan Stanley and JP Morgan. As the Wikipedia article points out, such agreements “ask that broker to allocate a portion of the commission directly to an independent research provider.” Here, one wonders what the word independent really means…

Back to Wearables: The announcements pile on.

Samsung tells us they’re moving their smartwatches away from Android to a version of Tizen, itself based on a version of the ubiquitous Linux.

Google announces Android Wear, a version of Android for smartwatches.

Motorola, soon to be a Lenovo brand, announces that its moto 360 smartwatch is “Coming Summer 2014 in a selection of styles” and provides these artful renderings:

Moto Wrist Edited

and…

Moto Modern

(I write renderings because, as the Android Wear intro video indicates, these are simulated pictures. This doesn’t mean that the final product won’t be better looking– but we’re clearly not there yet.)

Why the haste? Did Tim Cook succeed in misdirecting Apple’s competition when he pronounced wearables a “very key branch of the tree? Or is there a giant business to be had?

We have many unanswered questions.

First, paraphrasing Horace Dediu, there are the twin questions of For What and By Whom: For what job is a smartwatch “hired”, and by whom? If we look at phones as a model, we see two “employers”: Carriers hire smartphones to increase their ARPU; normal consumers use them as small, ubiquitous, always-connected personal computers.

Will this model work for smartwatches? We can almost certainly eliminate carriers from the equation: Subsidies are out of question because a watch is unlikely to generate carrier revenue.

For us users, a smartwatch collects sensor data, connects to our smartphone, displays alerts, responds to touch and voice commands… and even tells us the time. These are all worthwhile functions that make for neat promo videos, but to keep users interested after the novelty wears out, smartwatches will have to do more than log the miles we’ve run, give us weather updates, and show us the name of the person who’s ringing the smartphone in our pocket. Put another way: We’re willing to pay a premium for our smartphones (whether directly or by contract) because of the huge range of features they provide, the enormous number of apps in the app stores. Will we be as durably aroused – and willing to part with substantial amounts of money – by (yet another) pulse rate app?

Another batch of questions: Since we no longer need a dedicated timepiece to tell us the time — our smartphone does that — Who wears a (dumb) watch these days, How, When, and Why?

Simplifying a bit, younger people don’t wear watches at all and older generations use them as jewelry — and gender-specific jewelry, at that. Furthermore, how many veteran watch-wearers wear the same watch all the time? Many of us own more than one watch, and select the appropriate timepiece (or two — or none at all) for the occasion. These aren’t trivial issues, they’re uncharted territory for mobile device makers and marketers.

Next question: How will smartwatch makers handle the delicate equilibrium between computing power and battery power? As smartwatches evolve and offer more features, a better display, and a more responsive user interface, they’ll need more computing power — and more computing power means a quicker battery drain. Will we put up with watches that run out of power at the end of the day? Will designers retard functionality in order to extend battery life to 24 hours and beyond… or make a smartwatch so big it’ll look like a miniature phone?

The power equilibrium question is why Samsung moved to a dedicated (and pared down) version of Tizen, and why Google did the same for Android Wear. All without giving much information of battery life.

Finally: Is there a business, there? Here in the Valley, Pebble CEO Eric Migicovsky claims to have sold 400,000 watches since January, 2013. At around $150 each, that’s $60M in revenue — a real tribute to Eric’s long-standing belief in wearables (he’s been working at it for six years).

But even if you multiplied this number by 10, it would barely nudge the needle for a large companies such as Samsung, Motorola/Lenovo, or Apple, which means these devices will be confined to the role of smartphone companion. They’ll help make money by enhancing the main product; they’re not going to be a $10B business in themselves.

As Charles Arthur writes in The Guardian, there are fewer than half a million smartwatches in use in the UK: “Wearable computing faces an uphill battle breaking through to the mainstream…”. Similarly, the Register doesn’t see any good, large-scale answers to the question. It calls Google wearables “A solution looking for a rich nerd”.

These challenges might explain why Apple doesn’t seem to have caught this Spring’s Wearables Fever. Smartwatches are destined to be ecosystem extensions, not The Next Big Thing.

JLG@mondaynote.com

One last thought before we close: Not all Ecosystem Extensions are equal. The no-longer-a-hobby Apple TV now brings substantial revenue and growth:

“Sales of the Apple TV are estimated to have grown by 80 percent in 2013, reaching around 10 million units for the calendar year, or some $1 billion worth of set-top boxes sold to end users.”

Horace Dediu puts a “Fortune 130” label on iTunes. By itself, with yearly gross revenue of $23.5B and growing 34%, iTunes is large enough to rank #130 in the Fortune list of the 500 largest US companies:

On a yearly basis iTunes/Software/Services is nearly half of Google’s core business and growing slightly faster.”

While music sales are on the wane, apps and video (mostly Apple TV) show healthy growth. Compared to an Apple TV, how much would an iWatch add to the iTunes business? Apps? Content?

Apple seems wise to stay out of the game until it can make something more lasting than a novelty.

CarPlay Thoughts

 

Who wouldn’t want an iPhone- or Android-like experience in their car instead of today’s misbegotten navigation and entertainment systems? CarPlay’s answer looks nice – until one looks at the details.

Apple’s CarPlay has an air of inevitability. Previously dubbed “iOS in the Car”, CarPlay brings the iPhone’s aesthetics, ease of use, consistency, and universe of apps to the ugly and dumbfounding world of car navigation and entertainment systems.

Seven years after the iPhone launched the Smartphone 2.0 wave, Apple kickstarts another mobile revolution…

It’s an enticing, simple vision. Instead of today’s disjointed systems — which often cost in the $1,000 range, plus $249 for a DVD of updated maps — you get a screen the size of a small tablet running iOS apps with voice and touch control (on-screen and armrest), off-air map updates, open-ended flexibility… We have arrived.

I’ve struggled with dashboard electronics from German, Japanese, and French car makers (no electronics on the old family Chevrolets), and I’ve seen what happened to Ford when it tried to use Microsoft software for its Sync system. Replacing these hairballs with an iOS system only makes sense.

But sense and reality are still living apart.

carplay2

To start, the “iOS in the Car” phrase is misleading. The iOS device “in your car” is the iPhone or iPad that you’ve brought with you — Apple isn’t about to license iOS to automakers (which may be part of the reason why Apple changed the name to “CarPlay”).

And Apple isn’t going to try to take the place of suppliers such as Delphi, VDO, and Aisin by making subsystems for carmakers — it’s not in Apple’s DNA. Not that it would matter if they tried: Automakers have made an art of pinching fractions of cents from their suppliers’ prices; they’d never tolerate Apple’s margins.

CarPlay replicates your iDevice’s screen as H.264 video spewed through an intelligent Lightning cable connected to your car’s USB port. The video format is widely accepted, so the in-car device either understands it already, or can be updated to do so.

So far, so good. As many observers have pointed out, the idea is a wired echo of Apple’s AirPlay, the technology that connects your iDevices (and other compliant products) to your television via the Apple TV black puck. Complications may arise when you consider the various in-dash screen sizes, resolution, actual uses of USB connections (my car’s USB connector is useless for anything other than charging my smartphone), and other mysterious incompatibilities that are beyond Apple’s control. Still, in general, screen replication demands little from the car maker. As with Airplay and a dumb TV set, the intelligence stays inside the smartphone.

The CarPlay proposal is much more limited than the Open Automotive Alliance, a Google initiative that implants a customized version of Android into a car’s electronics. (“Audi connect” is available today; we can expect similar collaborations with Honda, GM and Hyundai.) But if the in-car system runs Android (or QNX, as is often the case today), so much the better, from the carmaker’s point of view: Let Google or one of its partner do all the work to create an Android-based all-in-one car system and let Apple hitch a ride after the work is done. Serving both Android and iOS users is a no-brainer.

It sounds good… but I can’t help but harbor uneasy feelings about this whole “scene”.

To begin with, we have a clash of cultures. To be sure, Eddy Cue, Apple’s Senior VP of Internet Software and Services, is a dealmaking expert and, as a member of the Board of Ferrari, he has serious automotive industry connections. But the spirit that drives Apple is far from that which motivates automakers.

The automotive industry expects to be in control of everything that gets into their cars. The coup that Apple pulled off with the iPhone and AT&T — taking full control of the content, no crapware, iTunes only for media — isn’t going to happen with Mercedes-Benz, or BMW, or even Hyundai. Cars aren’t phones. We’re not going to see aftermarket Toyota CarPlay kits (let alone entire cars) in Apple Stores. Apple won’t get what it always strives for: Controlled Distribution.

Then there’s the F-word: Fragmentation. In-car electronics are a mess, a new culture grafted onto an old one, Silicon Valley and Detroit in a loveless marriage. Actually, that’s  unfair: Under the hood, embedded electronics do wonders to improve the reliability, safety, and economy of our cars. But where the union breaks down is in the User Experience domain. Competent combustion management engineers and the accountants watching over their shoulders have no empathy for smartphone-loving drivers.

The meanderings get more twisted when we consider a key difference between Google and Apple. Google could tell Audi that they’ll pay, in some form, for the user data collected by Audi connect— but Audi already makes a lot of money, they don’t want to open that can of worms. As they say in their privacy agreement:

“We will not share information about you or your Audi vehicle that is connected with your use of Audi connect’s in-car features with third parties for their own purposes without your consent.”

But what would a legally-troubled, profit-starved automaker such as GM say in response to Google’s offer to subsidize the in-car system?

Apple hasn’t played that game.

An all-in-one navigation/communications/entertainment system is a pleasant dream, it feels “right”. But the technical, business model, and cultural obstacles could make for a long, arduous march.

CarPlay could be a very smart way to hitch a ride on many in-car systems without having to struggle with their design and cost challenges, yet another ecosystem extension play.

JLG@mondaynote.com