Amazon and Apple Business Models

 

Amazon “loses” money, Apple makes tons if it. And yet, Wall Street prefers Jeff Bezos’s losses to Tim Cook’s. A look at the two very different cash machines will help dispel the false paradox.

The words above were spoken by an old friend and Amazon veteran, as three French émigrés talked shop at a Palo Alto watering hole. The riposte would fit as the epigraph for The Amazon Money Pump For Dummies, an explanation of Amazon’s ever-ascending stock price while the company keeps “losing money”.

(I don’t like the term Business Model, and Bizmodel even less so. I prefer Money Pump with its lively evocations: attach the hose, adjust the valves, prime the mechanism, and then watch the flow of money from the customer’s pocket to the investor’s purse).

Last quarter, Amazon’s revenue grew by 24% year-on-year, and lost about 1% of its net sales of $17B. This strong but profitless revenue growth follows an established pattern:

AMZN No Profit Growth copy
Despite the company’s flat-lined profits, Wall Street loves Amazon and keeps sending its shares to new heights. Since its 1997 IP0, AMZN has gone from $23 to $369/share:

298 share 21x
How come?

[Professional accountants: Avert your eyes; the following simplification could hurt.

Profit isn't cash, it's merely an increase in the value of your assets. Such increase can be illiquid. Profit is an accountant's opinion. Cash is a fact.]

Amazon uses its e-commerce genius to prime the money pump. The company seduces customers through low prices, prompt delivery, an ever-expanding array of services and products, and exemplary customer attention. What keeps the pump going is the lag between the moment they ding my credit card and the time that they pay Samsung for the Galaxy Note tablet I ordered. Last quarter, Amazon’s daily revenue was about $200M ($17B divided by 90 days). If it waits just 24 hours to pay its suppliers, the company has $200M to play with. If it delays payment for a month, that’s $6B it can use to invest in developing the business. Delay an entire quarter…the numbers become dizzying.

But, you’ll say, there’s nothing profoundly original there. All businesses play this game, retail chains depend on it. Definitely — but what sets Amazon apart is what it does with that flow of free cash. The company is relentless in building the best services and logistics machine on Earth. Just this week, we read that Amazon has hired the US Post Office to deliver Amazon packages (only) on Sundays.

Amazon uses cash to build a better Amazon that keeps bringing in more cash.

Why do suppliers “loan” Amazon such enormous amounts of cash? Why do they let the company grow on their backs? Because, just like Wall Street, they trust that the company will keep growing and give them ever more business. Amazon might be a hard taskmaster, but it can be trusted to pay its bills (eventually) — the same cannot be said of some other retail organizations.

Amazon doesn’t care that it doesn’t make a “profit” on the sale of a box of Uni-Ball pens that it ships for free. Rather, it focuses on pumping enormous amounts of cash into the virtuous spiral of an ever-expanding business. Wall Street rewards the company with an equally expanding market cap.

How long can Amazon’s expansion last? Will the tree grow to the sky? If we consider a single line of business — books, for example — saturation will inevitably set in. But one of the many facets of Bezos’ genius is that he’s always been able to find new territories. Amazon Web Services is one area where the company is now larger than all of its competitors combined, and shows no sign of slowing down or of approaching saturation.

In the end, we mustn’t be fooled by the simplicity of Amazon’s money pump. Bezos’ genius is in the implementation, in the details. Like a chef who’s not afraid to disclose his recipes, Bezos writes to his shareholders every year — his missives are all here — And he always appends his first 1997 letter, thus reminding everyone that he’s not about to lose the plot.

The other friend in this conversation, an old Apple hand, happily nodded along as our ex-Amazon compatriot told stories from his years in the Seattle trenches. When asked about the Apple money pump and why Wall Street didn’t seem to respect Apple’s huge profits, he started with an epigraph of his own:

The simplest encapsulation of Apple’s business model is the iPod.

To paraphrase: The iPod is the movie star, it brings the audience flocking to the theatre; iTunes is the supporting cast.

iTunes was initially perceived as a money-losing operation, but without it the iPod would have been a good-looking but not terribly useful piece of hardware. iTunes propelled iPod volumes and margin by providing an ecosystem that comprised two innovations: “music by the slice” (vs. albums,) and a truly new micro-payment system (99 cents charged to a credit card).

That model is what powers the Apple money pump today. The company’s personal computers — smartphones, tablets, and laptops/desktops — are the movie stars. Everything else exists to make these lead products more useful and pleasant. Operating systems, applications, stores, Apple TV, the putative iWatch…they’re all part of the supporting cast.

Our Apple friend offered another thought: The iPod marked the beginning of the Post-PC era. By 2006 — a year before the introduction of the iPhone — iPod sales had exceeded Mac revenue.

Speaking of cash, Apple doesn’t need to play Amazon’s timing games. Product margins range from 20-25% for desktops and laptops (compared to HP’s 3-5%), to 65% or more for iPhones. With cash reserves reaching $147B at the end of September 2013, Apple has had to buy shares back and pay dividends to bleed off the excess.

Far from needing a “loan” from its suppliers, Apple heads in exactly the opposite direction. On page 37 of the company’s 2013 10-K (annual) filing, you’ll find a note referring to “third-party manufacturing commitments and component purchase commitments of $18.6 billion“. This is a serious cash outlay, an advance to suppliers to secure components and manufacturing capacity that works out to $50 for every person in the US…

Wall Street’s cautious regard for Apple seems ill-advised given Apple’s ability to generate cash in embarrassing amounts. As the graph below shows, after following a trajectory superficially similar to Amazon’s, Apple apparently “fell from grace” in 2012:

298 fall from grace
I can think of two explanations, the first one local, the other global.

During Fiscal 2012, ending in September of that year, Apple’s Gross Margins reached an unprecedented high of 43.9%. By all standards, this was extremely unusual for a hardware company and, as it turned out, it was unsustainable. In 2013, Apple Gross Margin dropped by more than 6 percentage points (630 basis points in McKinsey-speak), an enormous amount. Wall Street felt the feast was over.

Also, Fiscal 2013 was seen as a drought year. There were no substantial new products beyond the iPhone 5 and the iPad mini announced in September and October 2012, and there was trouble getting the new iMacs into customers’ hands during the Holiday season.

More globally important is the feeling that Apple has become a “hits” business. iPhones now represent 53% of Apple’s revenue, and much more (70%?) of its profits. They sell well, everything looks rosy…until the next season, or the next round of competitive announcements.

This is what makes Wall Street nervous: To some, Apple now looks like a movie studio that’s too dependent on the popularity of its small stable of stars.

We hear that history will repeat itself, that the iPhone/iPad will lose the battle to Android, just as the Mac “lost” to Windows in the last century.

Our ex-Apple friend prefers an automotive analogy. Audi, Tim Cook’s preferred brand, owns a small portion of the luxury car market (about 7.5%), but it constantly posts increasing profits — and shows no sign of slacking off. Similarly, today’s $21B Mac business holds a mere 10% of the PC market, but Apple “uses” that small share to command 45% of market profits. The formula is no secret but, as with Amazon’s logistics and service, the payoff is in the implementation, how the chef combines the ingredients. It’s the “mere matter of implementation” that eluded Steve Ballmer’s comprehension when he called the MacBook an Intel laptop with an Apple logo slapped on it. Why wouldn’t the Mac recipe also work for smartphones and tablets?

JLG@mondaynote.com

 

New iWork: Another Missed Opportunity To Set Expectations

 

With the 5.0 iWork suite we revisit Apple’s propensity to make lofty claims that fall short of reality. The repetition of such easily avoidable mistakes is puzzling and leads us to question what causes Apple executives to squander the company’s well-deserved goodwill.

Once upon a time, our youngest child took it upon herself to sell our old Chevy Tahoe. She thought her father was a little too soft in his negotiations on the sales lot, too inclined to leave money on the table in his rush to end the suffering.

We arrive at the dealership. She hops out, introduces herself to the salesperson, and then this kid — not yet old enough to vote — begins her pitch. She starts out by making it clear that the car has its faults: a couple dents in the rear fender, a stubborn glove compartment door, a cup holder that’s missing a flange. Flaws disclosed, she then shows off the impeccable engine, the spotless interior, the good-as-new finish (in preparation, she’d had the truck detailed inside and out, including the engine compartment).

The dealer was charmed and genuinely complimentary. He says my daughter’s approach is the opposite of the usual posturing. The typical seller touts the car’s low mileage, the documented maintenance, the vows of unimpeachable driver manners. The seller tries to hide the tired tires and nicked rims, the white smoke that pours from the tail pipe, the “organic” aroma that emanates from the seat cushions — as if these flaws would go unnoticed by an experienced, skeptical professional.

‘Give the bad news first’ said the gent. ‘Don’t let the buyer discover them, it puts you on the defensive. Start the conversation at the bottom and end with a flourish.’ (Music to this old salesman’s ears. My first jobs were in sales after an “unanticipated family event” threw me onto the streets 50 years ago. I’m still fond of the trade, happiest when well executed, sad when not).

The fellow should have a word or two with Apple execs. They did it again, they bragged about their refurbished iWork suite only to let customers discover that the actual product fails to meet expectations.

We’ll get into details in a moment, but a look into past events will help establish the context for what I believe to be a pattern, a cultural problem that starts at the top (and all problems of culture within a company begin at the executive level).

Readers might recall the 2008 MobileMe announcement, incautiously pitched as Exchange For The Rest of Us. When MobileMe crashed, the product team was harshly criticized by the same salesman, Steve Jobs, who touted the product in the first place. We’ll sidestep questions of the efficacy of publicly shaming a product team, and head to more important matters: What were Jobs and the rest of Apple execs doing before announcing MobileMe? Did they try the product? Did they ask real friends — meaning non-sycophantic ones — how they used it, for what, and how they really felt?

Skipping some trivial examples, we land on the Maps embarrassment. To be sure, it was well handled… after the fact. Punishment was meted out and an honest, constructive apology made. The expression of regret was a welcome departure from Apple’s usual, pugnacious stance. But the same questions linger: What did Apple execs know and when did they know it? Who actually tried Apple Maps before the launch? Were the execs who touted the service ignorant and therefore incompetent, or were they dishonest, knowingly misrepresenting its capabilities? Which is worse?

This is a pattern.

Perhaps Apple could benefit from my daughter’s approach: Temper the pitch by confessing the faults…

“Dear customers, as you know, we’re playing the long game. This isn’t a finished product, it’s a work in progress, and we’ll put your critical feedback to good use.”

Bad News First, Calibrate Expectations. One would think that (finally!) the Maps snafu would have seared this simple logic into the minds of the Apple execs.

But, no.

We now have the iWork missteps. Apple calls its new productivity suite “groundbreaking”. Eddy Cue, Apple’s head of Internet Software and Services, is ecstatic:

“This is the biggest day for apps in Apple’s history. These new versions deliver seamless experiences across devices that you can’t find anywhere else and are packed with great features…” 

Ahem… Neither in the written announcement nor during the live presentation will one find a word of caution about iWork’s many unpleasant “features”.

The idea, as best we can discern through the PR fog, is to make iOS and OS X versions of Pages, Numbers, and Keynote “more compatible” with each other (after Apple has told us, for more than two years, how compatible they already are).

To achieve this legitimate, long game goal, the iWork apps weren’t just patched up, they were re-written.

The logic of a fresh, clean start sounds compelling, but history isn’t always on the side of rewriting-from-scratch angels. A well-known, unfortunate example is what happened when Lotus tried a cross-platform rewrite of its historic Lotus 1-2-3 productivity suite. Quoting from a Wikipedia article:

“Lotus suffered technical setbacks in this period. Version 3 of Lotus 1-2-3, fully rewritten from its original macro assembler into the more portable C language, was delayed by more than a year as the totally new 1-2-3 had to be made portable across platforms and fully compatible with existing macro sets and file formats.”

The iWorks rewrite fares no better. The result is a messy pile of missing features and outright bugs that educed many irate comments, such as these observations by Lawrence Lessig, a prominent activist, Harvard Law professor, and angry Apple customer [emphasis and edits mine]:

“So this has been a week from Apple hell. Apple did a major upgrade of its suite of software — from the operating system through applications. Stupidly (really, inexcusably stupid), I upgraded immediately. Every Apple-related product I use has been crippled in important ways.

… in the ‘hybrid economy’ that the Internet is, there is an ethical obligation to treat users decently. ‘Decency’ of course is complex, and multi-faceted. But the single dimension I want to talk about here is this: They must learn to talk to us. In the face of the slew of either bugs or ‘features’ (because as you’ll see, it’s unclear in some cases whether Apple considers the change a problem at all), a decent company would at least acknowledge to the public the problems it identifies as problems, and indicate that they are working to fix it.”

Lessig’s articulate blog post, On the pathological way Apple deals with its customers (well worth your time), enumerates the long litany of iWork offenses.

Srange Paste Behavior copy

[About that seemingly errant screenshot, above...keep reading.]

Shortly thereafter, Apple issued a support document restating the reasons for the changes:

“…applications were rewritten from the ground up to be fully 64-bit and to support a unified file format between OS X and iOS 7 versions” 

and promising fixes and further improvements:

“We plan to reintroduce some of these features in the next few releases and will continue to add brand new features on an ongoing basis.”

Which led our Law Professor, who had complained about the “pathologically constipated way in which Apple communicates with its customers”, to write another (shorter) post and thank the company for having at last “found its voice”…

Unfortunately, Lessig’s list of bugs is woefully short of the sum of iWork’s offenses. For example, in the old Pages 4.0 days, when I click on a link I’m transported to the intended destination. In Pages 5.0, instead of the expected jump, I get this…

[See above.]

Well, I tried…CMD-CTRL-Shift-4, frame the shot, place the cursor, CMD-V… Pages 5.0 insists on pasting it smack in the middle of a previous paragraph [again, see above].

Pages has changed it’s click-on-a-link behavior; I can get used to that, but…it won’t let me paste at the cursor? That’s pretty bad. Could there be more?

There’s more. I save my work, restart the machine, and the Save function in Pages 5.0 acts up:

Pages 5.0 Autosave Bug copy

What app has changed my file? Another enigma. I’m not sharing with anyone, just saving my work in my Dropbox, something that has never caused trouble before.

Another unacceptable surprise: Try sending a Pages 5.0 file to a Gmail account. I just checked, it still doesn’t work. Why wasn’t this wasn’t known in advance – and not fixed by now?

I have to stop. I’ll leave comparing the even more crippled iCloud version of iWork to the genuinely functional Web version of Office 365 for another day and conclude.

First. Who knew and should have known about iWork’s bugs and undocumented idiosyncrasies? (I’ll add another: Beware the new autocorrect)

Second. Why brag instead of calmly making a case for the long game and telling loyal customers about the dents they will inevitably discover?

Last and most important, what does this new fiasco say about the Apple’s management culture? The new iPhones, iPad and iOS 7 speak well of the company’s justly acclaimed attention to both strategy and implementation. Perhaps there were no cycles, no neurons, no love left for iWork. Perhaps a wise general puts the best troops on the most important battles. Then, why not regroup, wait six months and come up with an April 2014 announcement worthy of Apple’s best work?

JLG@mondaynote.com

———

This hasn’t been a good week using Apple products and services. I’ve had trouble loading my iTunes Music library on an iPad, with Mail and other Mavericks glitches, moving data and apps from one computer to another, a phantom Genius Bar appointment in another city and a stubborn refusal to change my Apple ID. At every turn, Apple support people, in person, on the phone or email, were unfailingly courteous and helpful. I refrained from mentioning iWork to these nice people.

 

What to do with $250m in digital journalism? (1)

 

Pierre Omidyar, Ebay’s founder and now philanthropist, pledged $250m to a new investigative reporting venture. Starting a project of this magnitude from scratch isn’t an everyday occurrence, leading us to wonder how it could look like? (First of two articles) 

For a digital journalism project, 250 million dollars (€185m) is a serious investment. So far, it’s unclear whether this is a one-time investment, merely initial funding (Omidyar’s share in eBay is approx. $8.5bn), or just yearly running costs. To put things in perspective, The New York Times’ 1300 people newsroom costs around $200m per year, including $70m for international coverage alone, i.e. reporting abroad and maintaining 24 foreign bureaus manned by 50 reporters. But, by most measures, the scope of NYT operations is at the far end of the scale.

A more realistic example is the funding of the non-profit media ProPublica (see a previous Monday Note on the subject). According to its 2012 financial statement (PDF here), ProPublica has raised a little more than $10m from philanthropic organizations and spends less than that for a 30 persons staff. No one disputes that, journalistically speaking, ProPublica is a remarkable publication; it faithfully follows its “Journalism in the Public Interest” mission statement, collecting two Pulitzer Prizes in so doing.

Great journalism can be done at a relatively minimal cost, especially when focused on a narrow segment of the news spectrum. On the other hand, as the New York Times P&L shows, the scope and size of its output directly correlates to the money invested in its production – causing the spending to skyrocket as a result.

Since we know little of Pierre Omidyar’s intentions (interview here in the NYT and a story outlining the project), I’ll spare Monday Note readers my usual back-of-the-envelope calculations, and I’ll stick to a general outline of what a richly funded news ventures could look like.

Staffing structure. Once again, ProPublica shows the way: a relatively small team of young staffers, coached by seasoned reporters and editors. For this, Omidyar draws the hottest name in the field, namely the lawyer-activist-Guardian blogger Glenn Greenwald, who played a prominent role in the Snowden leaks (more about him: his blog on The Guardian; a NYT Magazine profile of Greenwald’s pal Laura Poitras, another key Snowden helper).

Greenwald_guardian

Multi-layer hierarchy is the plague of legacy media. The org chart should be minimalist. A management team of five dedicated, experienced editors is sufficient to lead a 24/365 news structure. Add another layer for production tasks and that’s pretty much it. As for the headcount, it depends on the scope of the news coverage: My guess is a newsroom of 100-150, including a production staff (I’ll come back to that in a moment) can do a terrific  job.

No Guild, no unions, no syndicats à la française, please. Behind their “fighting for our people” façade, they cynically protect their cushy prebends and accelerate the industry’s demise. As a result, the field is left open to pure players – who are keeping people in stables, content-recycling factories.

Beyond that, avoiding any kind of collective bargaining allows management to pay whatever will be necessary to hire and retain talent, without relying to fake titles or bogus hierarchy positions to justify their choices. In addition, above-market salaries should discourage ethically dubious external gigs. Lastly, a strict No-Kolkhoze governance must be enforced from the outset; collaboration and heated intellectual debate is fine as long as it doesn’t emasculate decisions, development, innovation – and speed.

A Journalism 2.0 Academy. I strongly believe in the training of staffers, journalists or not. Hiring motivated young lawyers, accountants, financial analysts, even scientists, and teaching them the trade of journalism is one the best ways to raise the competency level in a newsroom. It means having a couple of in-house “teachers” who will compile and document the best internal and external practices, and dispense those on a permanent basis. This is what excellence requires.

A Technology Directorate. On purpose, I’m borrowing jargon from the CIA or the FSB. A modern news organization should get inspiration from the intelligence community, with a small staff of top level engineers, hackers, cryptographers, data miners, semantic specialists. Together, they will collect data, protect communications for the staff and their sources, provide secured workstations, laptops and servers, build a mirroring infrastructure as a precaution against governmental intrusion. This is complex and expensive: It means establishing encrypted links between countries, preferably on a dedicated network (take advantage of Google’s anger against the NSA to rent capacity), and putting servers in countries like Iceland — a libertarian country and also one of the most connected in the world. While writing this, I ran a couple of “ping” tests, and it turned out that, from Europe, the response-time from an Icelandic server is twice as short as from the New York Times!

Besides assisting the newsroom, tech staff should build a secure and super-fast and easy-to-use Content Management System. Most likely, the best way will turn out to be a WordPress system hack – as Forbes, Quartz, AllThingsD, and plenty of others did. Whatever the setup ends up being, it must be loaded with a powerful semantic engine, connected to scores of databases that will help enrich stories with metadata (see a previous Monday Note on the subject The story as gateway to knowledge). By the same token, a v2.0 newsroom should have its own “aggrefilter”, its own Techmeme that will monitor hundreds websites, blogs and twitter feeds and programmatically collect the most relevant stories. This could be a potent tool for a newsroom (we are building one at Les Echos that will primarily benefit our news team.)

Predictive Analysis Tools and Signal-to-Noise detection. In a more ambitious fashion, an ideal news machine should run analytics aimed at anticipating/predicting spasms in the news cycle. Pierre Omidyar and Glenn Greenwald should acquire or build a unit like the Swedish company Recorded Future (more in this story in Wired UK), which is used by large corporations and by the CIA. Perhaps more realistically, building tools to analyze and decipher in realtime the internet’s “noise”, and being able to detect “low-level signals” could be critical to effectively surfing the wave.

That’s all for today. Next week, I’ll address two main points: Designing modern news products, and ideas on how to make (some) money with this enthralling venture.

frederic.filloux@mondaynote.com

Intel Is Under New Management – And It Shows

 

Intel rode the PC wave with Microsoft and built an seemingly insurmountable lead in the field of “conventional” (PCs and laptops) microprocessors. But, after his predecessor missed the opportunity to supply the CPU chip for Apple’s iPhone, Intel’s new CEO must now find a way to gain relevance in the smartphone world.

In last May’s The Atlantic magazine, Intel’s then-CEO Paul Otellini confessed to a mistake of historic proportions. Apple had given Intel the chance to be part of the smartphone era, to supply the processor for the first iPhone… and Otellini said no [emphasis and light editing mine]:

“The thing you have to remember is that this was before the iPhone was introduced and no one knew what the iPhone would do… At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.”
“…while we like to speak with data around here, so many times in my career I’ve ended up making decisions with my gut, and I should have followed my gut. [...] My gut told me to say yes.”

That Otellini found the inner calm to publicly admit his mistake — in an article that would be published on his last day as CEO, no less — is a testament to his character. More important, Otellini’s admission unburdened his successor, Brian Krzanich, freeing him to steer the company in a new direction.

And Krzanich is doing just that.

First: House cleaning. Back in March 2012, the Wall Street Journal heralded Intel as The New Cable Guy. The idea was to combine an Intel-powered box with content in order to serve up a quality experience not found elsewhere (read Apple, Netflix, Roku, Microsoft…). To head the project, which was eventually dubbed OnCue, Intel hired Erik Huggers, a senior industry executive and former head of BBC Online.

At the All Things D conference in February, Huggers announced that the TV service would be available later this year. The Intel TV chief revealed no details about how the service OnCue would differ from existing competitors, or how much the thing would cost…but he assured us that the content would be impressive (“We are working with the entire industry”), and the device’s capabilities would be comprehensive (“This is not a cherry-pick… this is literally everything”).

Intel seemed to be serious. We found out that more than 1,000 Intel employees in Oregon had been engaged in testing the product/service.

Then Krzanich stepped in, and applied a dose of reality:

Intel continues to look at the business model…. we are not experts in the content industry and we’re being careful.” [AllThingsD: New Intel CEO Says Intel TV Sounds Great in Theory. But …]

Indeed, to those of us who have followed the uneasy dance between Apple and content providers since the first Apple TV shipped in 2007, the Intel project sounded bold, to say the least.

Late September, the project was put on hold and, last week, the news came that OnCue had been cancelled and allegedly offered to Verizon, whose V Cast media distribution feats come to mind…

Even before OnCue’s cancellation was made official, the well-traveled Erik Huggers appeared to show an interest in the Hulu CEO job. (If Mr Huggers happens to be reading this: I’d be more than happy to relieve you of the PowerPoints that you used to pitch the project to Intel’s top brass, not to mention the updates on the tortuous negotiations for content, and the reports from the user testing in Oregon. These slides must make fascinating corpospeak logic.)

Krzanich quickly moved from doubt to certainty. He saw that OnCue would neither make money by itself, nor stimulate sales or margins for its main act, x86 processors. OnCue would never be an Apple TV “black puck”, a supporting character whose only mission is to make the main personal computers (small, medium and large; smartphones, tablets and conventional PCs) more useful and pleasant.

So he put an end to the impossible-to-justify adventure.

That was easy.

Tackling Intel’s failure to gain a significant role in the (no longer) new world of smartphones is a much more complicated matter.

With its x86 processors, Intel worked itself into a more-than-comfortable position as part of the Wintel ecosystem. The dominant position achieved by the Microsoft-Intel duopoly over two decades yielded correspondingly high margins for both.

But smartphones changed the game. ARM processors proved themselves better than x86 at the two tasks that are integral to personal, portable devices: lowering power consumption and customization. The ARM architecture didn’t have to wait for the iPhone and Android handsets to dominate the cell phone business. Just as Windows licensing spawned a large number of PC makers, ARM licensing contributed to the creation of a wide range of processor design and manufacturing companies. The ARM site claims 80 licensees for its newer Cortex family and more than 500 for its older Classic Arm processors. No monopoly means lower margins.

Intel saw the unattractive margins offered by ARM processors and didn’t want to commit the billions of dollars required by a fab (a chip manufacturing plant) for a product that would yield profits that were well below Wall Street expectations.

The prospect of bargain basement margins undoubtedly figured in Otellini’s decision to say no to the iPhone. In 2006, no one could have predicted that it could have been made up in volume, that there would be a billion smartphone sales in 2014. (I’m basing the 1B number for the entire industry on Horace Dediu’s estimate of 250 million iOS devices for 2014.)

Even if the Santa Clara company had had the foresight to accept lower margins in order to ensure their future in the smartphone market, there would still have been the problem of customization.

Intel knows how to design and manufacture processors that used “as is” by PC makers. No customization, no problems.

This isn’t how the ARM world works. Licensees design processors that are customized for their specific device, and they send the design to a manufacturer. Were Intel to enter this world, they would no longer design processors, just manufacture them, an activity with less potential for profit.

This explains why Intel, having an ARM license and making XScale processors, sold the business to Marvell in 2006 – a fateful date when looking back on the Apple discussions.

But is Intel’s new CEO is rethinking the “x86 and only x86″ strategy? Last week, a specialty semiconductor company called Altera announced that Intel would fabricate some if its chips containing a 64-bit ARM processor. The company’s business consists of offering faster development times through “programmable logic” circuits. Instead of a “hard circuit” to be designed, manufactured, tested, debugged, modified and sent back to the manufacturing plant in lengthy and costly cycles, you buy a “soft circuit” from Altera and similar companies (Xilinx comes to mind). This more expensive device can be reprogrammed on the spot to assume a different function, or correct the logic in the previous iteration. Pay more and get functioning hardware sooner, without slow and costly turns through a manufacturing process.

With this in mind, what Intel will someday manufacture for Altera isn’t the 64-bit ARM processor that excited some observers: “Intel Makes 14nm ARM for Altera“. The Stratix 10 circuits Altera contracts to Intel manufacturing are complicated and expensive ($500 and up) FPGA (Field Programmable Gate Array) devices where the embedded ARM processor plays a supporting, not central, role. This isn’t the $20-or-less price level arena in which Intel has so far declined to compete.

Manufacturing chips for Altera might simply be work-for-hire, a quick buck for Intel, but I doubt it. Altera’s yearly revenue is just shy of $2B; Intel is a $50B company. The newly announced device, just one in Altera’s product lines, will not “move the needle” for Intel — not in 2014 (the ship date isn’t specified), or ever.

Instead, I take this as a signal, a rehearsal.  250M ARM SoCs at $20 each would yield $5B in revenue, 10% of Intel’s current total…

This might be what Krzanich had in mind about when he inked the “small” manufacturing agreement with Altera; perhaps he was weighing the smaller margins of ARM processors against the risk of slowing PC sales.

Graciously freed from the past by his predecessor, it’s hard to see how Intel’s new CEO won’t take the plunge and use the company’s superb manufacturing technology to finally

make ARM processors.

JLG@mondaynoye.com

 

The Age of the Platform

 

Before deciding what should comes “first” in digital, publishers must figure out the right production workflow. Each and every player must plot its very own path away from the now aging notion of publication to the broader platform model. 

Last week, I spent a few of days in Berlin at the European INMA conference. Among many interesting moments, there was our visit to the Axel Springer group, the number one print publisher in Germany that also operates scores of publications in 44 countries. In 2012, Springer had a revenue of €3.3bn and an EBIDTA of €628m; 40% of its revenue comes from digital, thanks to 160 different online properties and 120 applications. Attaining this level required an aggressive growth strategy: since 2006, Springer launched or acquired new digital activities at the stunning rate of one every two weeks!

Like most modern news outlets, Springer is obsessed with having everyone in the company work without distinction between digital and print. Its latest initiative involves the definitive transformation of the venerable daily Die Welt into a multimedia news factory. To achieve this, the company bets on the radical architecture of its brand new newsroom. Of course, Die Welt is not the first to bet on the physical setting of the workplace to accelerate changes. Among others, the UK’s Telegraph did the same several years ago (it didn’t go smoothly at first but, in the end, the effort paid back.)

Here is the floor plan of the Die Welt’s newsroom that will enter in operation within a couple of months (I reconstructed it from a picture and briefing notes) :

die_welt_newsrm_plan

The open space resembles a sound-proof cathedral on the ground floor of the Axel Springer building in the center of Berlin. It will operate from 5am to midnight. The star shape reflects the news products’ diversity and time imperatives; the closest the workstations are from the center (where on-duty management sits), the faster the treatments are supposed to be: mobile staffers will stay close to the top editors as people in charge of building pages for the daily will dwell at the outer edges. This newsroom is mostly a production center; it actually accommodates only half of the Die Welt 300+ editorial staff as reporters and some staff writers will be located in a separate room. Note how all individual offices are gone while the periphery is filled with meeting rooms of various sizes and shapes that staffers use as needed.

Management gurus often say a radical alteration of physical settings is a key instrument of change. I can’t agree more. Interestingly enough, a firm like Innovation Media Consulting I’ve known since the Nineties as mostly an art direction company now works with architects and workflow specialists to induce changes in the way newsrooms operate.

But a super-modern floor plan is only part of the equation. In last week’s Monday Note,  I addressed the need to make the story the kernel of a cluster of high value products. Both are merely components of a much deeper change, that is the creation of a true News Platform. Anglo-Saxon newsrooms enjoy several advantages over Southern Europe (for instance) ones. Since the beginning, their journalism is built on a clear separation between writers (or reporters) on one side, and editors on the other. Anglo-Saxon journalism comes embedded with a separation between the writing and the editing of journalistic material — that is not the custom in a country like France in which most interns sees themselves as potential heirs to Joseph Kessel. More seriously, here, the principle of heavy editing is much less accepted than in the US, UK or Germany where the process results in much better structured articles, and most powerful storytelling for long-form reporting. In addition, in those countries, newsrooms with top editors entirely dedicated to their role of managers are better equipped to address the needs of morphing news organizations. For the most part, these factors explain why, in the Anglo-Saxon world, the News Platform transformation is way ahead of anywhere else. Axel Springer’s management concedes that this radical news flow structure is the result of a process that started years ago — that’s why it has been smoothly accepted by the staff. Everyone now sees it as the indispensable platform to produce across all major vectors now used by the readers – mobile, tablets, web and print – with greater efficiency along with consistent quality,.

frederic.filloux@mondaynote.com

Security Shouldn’t Trump Privacy – But I’m Afraid It Will

 

The NSA and security agencies from other countries are shooting for total surveillance, for complete protection against terrorism and other crimes. This creates the potential for too much knowledge falling one day in the wrong hands.

An NSA contractor, Edward Snowden, takes it upon himself to gather a mountain of secret internal documents that describe our surveillance methods and targets, and shares them with journalist Glenn Greenwald. Since May of this year, Greenwald has provided us with a trickle of Snowden’s revelations… and our elected officials, both here and abroad, treat us to their indignation.

What have we learned? We Spy On Everyone.

We spy on enemies known or suspected. We spy on friends, love interests, heads of state, and ourselves. We spy in a dizzying number of ways, both ingenious and disingenuous.

(Before I continue, a word on the word “we”. I don’t believe it’s honest or emotionally healthy to say “The government spies”. Perhaps we should have been paying more attention, or maybe we should have prodded our solons to do the jobs we elected them for… but let’s not distance ourselves from our national culpability.)
You can read Greenwald’s truly epoch-making series On Security and Liberty in The Guardian and pick your own approbations or invectives. You may experience an uneasy sense of wonder when contemplating the depth and breadth of our methods, from cryptographic and social engineering exploits (doubly the right word), to scooping up metada and address books and using them to construct a security-oriented social graph.

We manipulate technology and take advantage of human foibles; we twist the law and sometimes break it, aided by a secret court without opposing counsel; we outsource our spying by asking our friends to suck petabytes of data from submarine fiber cables, data that’s immediately combed for keywords and then stored in case the we need to “walk back the cat“.

NSA-Merkel-Phone

Sunday’s home page of the German site Die Welt

The reason for this panopticon is simple: Terrorists, drugs, and “dirty” money can slip through the tiniest crack in the wall. We can’t let a single communication evade us. We need to know everything. No job too small, no surveillance too broad.

As history shows, absolute anything leads to terrible consequences. In a New York Review of Books article, James Bamford, the author of noted books on the NSA, quotes Senator Frank Church who, way back in 1975, was already worried about the dangers of absolute surveillance [emphasis mine]:

“That capability at any time could be turned around on the American people and no American would have any privacy left, such [is] the capability to monitor everything: telephone conversations, telegrams, it doesn’t matter. There would be no place to hide. If this government ever became a tyranny, if a dictator ever took charge in this country, the technological capacity that the intelligence community has given the government could enable it to impose total tyranny, and there would be no way to fight back, because the most careful effort to combine together in resistance to the government, no matter how privately it was done, is within the reach of the government to know. Such is the capability of this technology…. I don’t want to see this country ever go across the bridge. I know the capacity that is there to make tyranny total in America, and we must see to it that this agency and all agencies that possess this technology operate within the law and under proper supervision, so that we never cross over that abyss. That is the abyss from which there is no return.

From everything we’ve learned in recent months, we’ve fallen into the abyss.

We’ve given absolute knowledge to a group of people who want to keep the knowledge to themselves, who seem to think they know best for reasons they can’t (or simply won’t) divulge, and who have deemed themselves above the law. General Keith Alexander, the head of the NSA, contends that “the courts and the policy-makers” should stop the media from exposing our spying activities. (As Mr. Greenwald witheringly observes in the linked-to article, “Maybe [someone] can tell The General about this thing called ‘the first amendment’.”)

Is the situation hopeless? Are we left with nothing but to pray that we don’t elect bad guys who would use surveillance tools to hurt us?

I’m afraid so.

Some believe that technology will solve the problem, that we’ll find ways to hide our communications. We have the solution today! they say: We already have unbreakable cryptography, even without having to wait for quantum improvements. We can hide behind mathematical asymmetry: Computers can easily multiply very large numbers to create a key that encodes a message, but it’s astronomically difficult to reverse the operation.

Is it because of this astronomic difficulty — but not impossibility — that the NSA is “the largest employer of mathematicians in the country“? And is this why “civilian” mathematicians worry about the ethics of those who are working for the Puzzle Palace?

It might not matter. In a total surveillance society, privacy protection via unbreakable cryptography won’t save you from scrutiny or accusations of suspicious secrecy. Your unreadable communication will be detected. In the name of State Security, the authorities will knock on your door and demand the key.

Even the absence of communication is suspect. Such mutism could be a symptom of covert activities. (Remember that Bin Laden’s compound in Abbottabad was thoroughly unwired: No phones, no internet connection.)

My view is that we need to take another look at what we’re pursuing. Pining for absolute security is delusional, and we know it. We risk our lives every time we step into our cars — or even just walk down the street — but we insist on the freedom to move around. We’re willing to accept a slight infringement on our liberties as we obey the rules of the road, and we trust others will do the same. We’re not troubled by the probability of ending up mangled while driving to work, but the numbers aren’t unknown (and we’re more than happy to let insurance companies make enormous profits by calculating the odds).

Regarding surveillance, we could search for a similar risk/reward balance. We could determine the “amount of terror” we’re willing to accept and then happily surrender just enough of our privacy to ensure our safety. We could accept a well-defined level of surveillance if we thought it were for a good cause (as in keeping us alive).

Unfortunately, this pleasant-sounding theory doesn’t translate into actual numbers, on either side of the equation. We have actuarial tables for health and automotive matters, but none for terrorism; we have no way of evaluating the odds of, say, a repeat of the 9/11 terrorist attack. And how do you dole out measures of privacy? Even if we could calculate the risk and guarantee a minimum of privacy, imagine that you’re the elected official who has to deliver the message:

In return for guaranteed private communication with members of your immediate family (only), we’ll accept an X% risk of a terrorist attack resulting in Y deaths and Z wounded in the next T months.

In the absence of reliable numbers and courageous government executives, we’re left with an all-or-nothing fortress mentality.

Watching the surveillance exposition unfold, I’m reminded of authoritarian regimes that have come and gone (and, in some cases, come back). I can’t help but think that we’ll coat ourselves in the lubricant of social intercourse: hypocrisy. We’ll think one thing, say another, and pretend to ignore that we’re caught in a bad bargain.

JLG@mondaynote.com

 

The story as gateway to knowledge (and revenue)

 

In digital journalism, the article is no longer an end in itself. Quite the contrary, it’s an entry point to the depths and riches of the web, and a significant contributor to the revenue stream.

Last week in Paris, I met the representative of a major US tech firm in charge of content-based partnerships. This witty, fast-thinking young engineer toured European capitals for an upcoming web + mobile platform, meeting guys like me in charge of digital operations in large media companies. Our discussion quickly centered on the notion of article in the digital world. Like many of his peers (I can’t  name them otherwise you might triangulate with whom I spoke), he looked at the journalistic article in an old-fashioned way: a block of text, augmented with links here and there, period.

This no longer is how it works — or how it should work.

There are many forms of digital journalistic contents. They range from the morning briefing you’ll eat up on your smartphone while inhaling your breakfast, or during your commute to work, to the long-form piece aimed at lean-back reading, preferably on a tablet and with a glass of chilled chardonnay. In between, there is the immense output of large media outlets that create good original content, hundreds of pieces every day.

If we draw a quick matrix of contents vs time and devices, chances are it will look like this:

usages, devices

As the graph shows, in a ideal world, a news stream should be broken into multiple formats to fit different devices at different times of the day. Of course, the size of the bubbles depicting usage intensity varies by market.

Three notes: the smartphone appears as the clear winner with high usage, spread all over the day; tablets enjoy the largest scope of contents (plus the highest engagement). As for the PC, it has been evicted as a vector for mainstream, general news. Still, thanks to its unparalleled capabilities and penetration as a productivity tool, the PC retains the most of the business uses. Consequently, the news read on a PC, largely in the context of a professional use, carry a greater value — as long as the article is linked to three different functions:

First as an audience concentrator from multiple sources, see here:

traffic drivers

Second, by building a system in which the article becomes an entry point to the web’s depths, i.e. to the trove of publicly and freely available databases. To get an idea of the open web’s riches, see the image below and click this link to dive into it:

debpedia_colored

 

This two-year old graph was designed by University of Berlin computer scientists. All these datasets are up for grabs by editors and publishers willing to expand their contents. Every single piece of news can be greatly augmented by hundreds of datasets orbiting around the DNpedia Knowledge Base (part of the Wikipedia Project.) According to its official description, the English version of DPpedia describes 4 million objects, including:

  • 832,000 persons
  • 639,000 places (including 427,000 populated places)
  • 372,000 creative works (including 116,000 music albums, 78,000 films and 18,500 video games)
  • 209,000 organizations (including 49,000 companies and 45,000 educational institutions), 226,000 species
  • 5,600 diseases.
  • When extended to the 119 available languages, the number of objects rises to 25 million.

The third way to raise the value of editorial contents is to use the article as a promotional vehicle for a broad set of ancillary products that media organizations should develop:

article upsell

(Needless to say, in this chart, Church and State must remain separated: the article is to be a journalistic product, aimed primarily at informing the public; the “promotional” aspect being only secondary.)

Until now, connecting to multiple datasets and up-selling extra products weren’t priorities for most legacy media. The main reasons are well-known: insufficient technological culture and investments  — which left the field totally open to pure players that made a modern, productive use of both datasets and new commercial channels. Things are changing though. Slowly.

frederic.filloux@mondaynote.com

iPhone 5S surprises

 

I will withhold judgment on the new iPhone until I have a chance to play customer, buy the product (my better half seems to like the 5C while I pine for a 5S), and use it for about two weeks — the time required to go beyond my first and often wrong impressions”.

I wrote those words a little over a month ago. I’ve now played customer for the requisite two weeks — I got an iPhone 5S on October 3rd — and I’m prepared to report.

But first, some context.

iPhone launches always generate controversy, there’s always something to complain about: Antennagate for the iPhone 4, the Siri beta for the 4S, the deserved Maps embarrassment last year – with a clean, dignified Tim Cook apology.

(Whether these fracas translate into lost revenue is another matter).

As I sat in the audience during the introduction of the original iPhone, back in January, 2007, I thought the demo was too good, that Steve was (again) having his way with facts. I feared that when the product shipped a few months later, the undistorted reality would break the spell.

We know now that the iPhone that Steve presented on the stage was unfinished, that he trod a careful path through a demo minefield. But the JesusPhone that Apple shipped — unfinished in many ways (no native apps, no cut-and-paste) — was more than a success: It heralded the Smartphone 2.0 era.

iphone 5s

This year, Tim Cook introduced the riskiest hardware/software combination since the original iPhone. The iPhone 5S wants to be more than just “new and improved”, it attempts to jump off the slope with its combination of two discontinuities: a 64-bit processor and a new 64-bit iOS. Will it work, or will it embarrass itself in a noisome backfire?

First surprise: It works.

Let me explain. I have what attorneys call “personal knowledge” of sausage factories, I’ve been accountable for a couple and a fiduciary for several others. I have first-hand experience with the sights, the aromas, the tumult of the factory floor, so I can’t help but wince when I approach a really new product, I worry in sympathy with its progenitors. The 5S isn’t without its “aromas” (we’ll get to those later), but the phone is sleek and attractive, the house apps are (mostly) solid, and the many new Application Programming Interfaces (API) promise novel applications. Contrary to some opinions, there are fewer warts than anyone could have expected.

Surprise #2, the UI: I had read the scathing critiques of the spartan excesses, and, indeed, I feel the drive for simplicity occasionally goes too far. The buttons on the built-in timer are too thin, too subdued. When I meditate in the dark I can’t distinguish Start from Cancel without my glasses. But I’m generally happy with the simpler look. Windows and views get out of the way quickly and gracefully, text is neatly rendered, the removal of skeuomorphic artifacts is a relief.

The next surprise is the fingerprint sensor a.k.a. Touch ID. Having seen how attempts to incorporate fingerprint recognition into smartphones and laptops have gone nowhere, I had my doubts. Moreover, Apple had acquired AuthenTec, the company that created the fingerprint sensor, a mere 15 months ago. Who could believe that Apple would be able to produce a fingerprint-protected iPhone so quickly?

But it works. It’s not perfect, I sometimes have to try again, or use another finger (I registered three on my right hand and two on my left), but it’s clear that Apple has managed to push Touch ID into the category of “consumer-grade technology”: It works often enough and delivers enough benefit to offset the (small) change in behavior.

A personal favorite surprise is Motion Sensing.

When Apple’s Marketing Supremo Phil Schiller described the M7 motion processor, I didn’t think much of it, I was serving the last days of my two-month sentence wearing the JawBone UP bracelet mentioned in a previous Monday Note. (A friend suggested I affix it to his dog’s collar to see what the data would look like.)

Furthermore, the whole “lifestyle monitoring” business didn’t seem like virgin territory. The Google/Motorola Moto X smartphone introduced last August uses a co-processor that, among other things, monitors your activities, stays awake even when the main processor is asleep, and adjusts the phone accordingly. A similar co-processing arrangement is present in Moto X’s predecessors, the Droid Maxx, Ultra and Mini.

But then I saw a Twitter exchange about Motion Sensing apps about a week after I had activated my iPhone 5S. One thumb touch later, the free Pedometer++ app asked for my permission to use motion data (granted) and immediately told me how many steps I’d taken over the past seven days.

I went to the chauffeured iPhone on my wife’s desk and installed the app. I did the same on friends’ devices. The conclusion was obvious: The M7 processor continuously generates and stores motion data independent of any application. A bit of googling shows that there are quite a few applications that use the motion data that’s obligingly collected by the M7 processor; I downloaded a number of these apps and the step counts are consistent.

(Best in class is the ambitious MotionX 24/7. Philippe Kahn’s company FullPower Technologies licenses MotionX hardware and software to many motion-sensing providers, including Jawbone and, perhaps, Apple. Wearable technologies aren’t just for our wrists…we carry them in our pockets.)

My wife asked if her iPhone would count steps from within her handbag. Ever the obliging husband, I immediately attended to this legitimate query, grabbed her handbag, and stepped out of the house for an experimental stroll. A conservatively dressed couple walked by, gave me a strange look, and didn’t respond to my evening greeting, but, indeed, the steps were counted.

A question arises: Does Apple silently log my movements? No, my iPhone records my locomotion, but the data stays within the device — unless, of course, I let a specific application export them. One must be aware of the permissions.

Other 5S improvements are welcome but not terribly surprising. The camera has been smartly enhanced in several dimensions; search finally works in Mail; and, to please Sen. McCain, apps update themselves automatically.

All of this comes with factory-fresh bugs, of course, a whiff of the sausage-making apparatus. iPhoto crashed on launch the first three or four times I tried it, but has worked without complaint since then.  A black Apple logo on a white background appeared and then quickly disappeared — too brief to be a full reboot, too sparse to be part of an app.

I’ve had to reboot the 5S to recover a dropped cellular connection, and have experienced hard-to-repeat, sporadic WiFi trouble that seems to spontaneously cure itself.(“How did you fix it?” asks my wife when her tech chauffeur gets the sullen device to work again. “I don’t know, I poke the patient everywhere until it responds.”)

From my admittedly geeky perspective, I’m not repelled by these glitches, they didn’t lose my data or prevent me from finishing a task. They’re annoying, but they’re to be expected given the major hardware and software changes. And I expect that the marketplace (as opposed to the kommentariat) will shrug them off and await the bug fixes that will take care of business.

So, yes, overall, the “discontinuous” 5S works.

[I'm also using a pre-release of Mavericks, the upcoming 10.9 version of OS X, on two Macs. There, I wonder if I'm not seeing the opposite of the iPhone 5S: less risk, more bugs. I hope things straighten out for the public release. I'll report if and when warranted.] [I can't resist: The Washington Post's Wonkblog calls the iPhone's third color... Dignified Gold. I wonder: Is it a compliment to Sir Jony's unerring taste? Or a clever, indirect ethnic slur?]

JLG@mondaynote.com

The Quartz Way (2)

 

Last week, we looked at Atlantic Media’s business site Quartz (qz.com) from an editorial and product standpoint. Today, we focus on its business model based on an emerging form of advertising. 

The Quartz business model is simple: it’s free and therefore entirely ad supported. Why? Doesn’t qz.com target a business readership that shouldn’t mind spending nine dollars a month? “It was part of the original equation: Mobile first, and free, embracing the open web”, explains publisher Jay Lauf, whom I met in Paris a couple of weeks ago. Jay is also an Atlantic Media senior vice-president and the group publisher (he once was Wired’s publisher).

jay-lauf-head-shot

Jay Lauf, Publisher (Photo: Quartz)

According to him, launching Quartz was the latest iteration of a much grander plan. Four years ago, Atlantic Media held a meeting aimed at defining their strategy: “What we will do, but also what we will not do”, says Jay Lauf. The group came up with three key priorities: #1 being a growth company (as opposed to passively manage the shift from print to digital). That idea was greatly helped by Atlantic’s ownership structure controlled by David Bradley. #2 “Digitally lead for everything”, which was not obvious for a ancient publication — Atlantic Monthly was created in 1857. #3 Atlantic must focus on “decision makers and influential people”.

Today, the goals set four years ago translate into a cluster of media brands reaching every month a highly solvent readership of 30 million people:

  • The Atlantic, the digital version of the eponymous magazine.
  • The Atlantic Wire aimed at a younger generation mostly relying on social media.
  • The Atlantic Cities, that focuses of urban centers and urban planning.
  • The National Journal that itself includes several publications, mostly about politics and society.
  • Government Executive Media, which operates a number niche publications covering the federal government (including its use of technology)
  • Atlantic Media Strategies, an independent division offering a full catalogue of advertising and marketing solutions. These range from analytics, social media campaigns and content creation, such as this one with General Electric in which a dedicated site features America’s economic futures – according to GE.

quartz_graph

All this brings us to Quartz’s business model. It relies entirely on native advertising also known as branded or sponsored content (see a previous Monday Note What’s Fuss About Native Ads?). Quartz’s implementation is straightforward: a small number of advertisers, served with high yield campaigns.

Below is yesterday’s screenshot of Quartz’s endless scroll, featuring regular displays of branded content (in this case Boeing):

qz_scroll_ads

Most of the time, the content is made or adapted especially for Quartz with a variable involvement of its advertising division (the branded content operations are kept segregated from the editorial department.) Quartz staff involvement goes from collaborating on the ad content to setting up HTML5 integration. On purpose, Quartz maintains a staff of copywriters and graphic designers assigned to assist brands in their communication. While ad spaces are clearly identified, their content is never completely dissociated from surrounding articles. Quite often, it reflects the newsroom’s “Obsessions“. Such precautions, plus the Quartz layout, warrant good click-rates and high prices. Quartz people are discreet about the KPIs, but sources in the ad community said that CPMs for its native ads content could be roughly ten times higher than traditional display ads.

Atlantic Media’s weight and bargaining power helped jumpstart the ad pump. A year ago, the site started with four brands: Chevron, Boeing, Credit Suisse and Cadillac. Today, Quartz has more twenty advertisers from the same league. Unlike other multi-page websites, its one-scroll structure not only proposes a single format, but also re-creates scarcity. (Plus the fact that Quartz does not have any mobile apps greatly simplifies the commercial process.) Still, it can be a double-edged sword: scarcity could indeed translate into high prices, but it also limits the number of available slots, therefore capping the revenue stream. Quartz’s publisher and head of sales made a tough choice — high rates vs. high volume — and so far it seems to work fine as the site is close to break-even ahead of schedule.

How far it can go remains to be seen. Quartz is a relatively small operation (50 people altogether, including 25 journalists producing 35-40 stories a day and a nice location in NYC’s Soho district.) My guess is it shouldn’t burn more than $10m a year. By extrapolating from the site’s audience, profitability sounds in reach of Quartz’s current “value model”. But the asymptote — factoring ads rates, number of slots, advertisers’ “dimension”, and traffic — could also be near and therefore constrain Quartz’s ability to scale up. That’s why the publication is now entering the crowded sector of conferences with its “Quartz Live”, featuring its customary exclusive attendance and editorial-rich ways. Will Quartz escape the temptation to launch paid-for products? Its journalistic content leaves open many opportunities in that field. For example, a mixture of semantic-assembled, high-end briefings, tailored to carefully profiled segments of its audience could generate a nice revenue stream, or ebooks and long-form features.
To be continued next year…

frederic.filloux@mondaynote.com