Revisiting Barbarians at the Gates: You be the judge


NOTE: I always urge my clients to reflect on their major decisions every 1-2 years. This blog was originally posted on March 2013, in response to this CNBC article. Now, some 24 months later, let’s see if I blew it or nailed it. The offset text renders the “VERDICT” on my strategic recommendations & predictions. Original article follows:


Barbarians at the Gates: An Open Letter to Microsoft’s New CEO and Apple’s Tim Cook

I used to cherish my CD and DVD collections. Now?  Not so much.  Which is exactly what Steve Jobs had in mind. See my previous article (The Future is in the Air).

The future of media is subscription.  That, of course, is old news. Why, then, are so many companies doing it all wrong?

Doing subscription wrong:

  • Google: relies on third-party pay ad model, and some licensing fees from Android.
  • Facebook:  relies on third-party pay ad model.
  • Yahoo:  relies on third-party pay ad model.

Who’s doing it right?  Apple, Amazon, and Netflix.  And Microsoft, sort of.  Who’s getting all the press?  Google, Facebook, and (because of the new CEO) Yahoo.

It’s the monetized users, stupid

Because the future is subscription, what matters in the media delivery world is not how many “users” you have.  It’s how many paying users you have.  Many companies are following a “freeumium” model, which relies on 5% of people to shoulder the costs for 100% of the users.  Record labels and movie studios do the same. But that doesn’t work very well when you are producing, licensing, and streaming massive media files.  You need customers who are already used to paying for services, such as large corporate customers. Then they can sneak in new services, sometimes for modest upgrade fees, to that same customer base.

Amazon’s Prime subscription is a perfect example.  At first, it was just a prepaid shipping credit, used to introduce higher switching costs for book-buying customers (back when Amazon had bookseller competitors). Now, Prime buys you free movies, ebooks, and music, plus other merchandise discounts. No doubt the price of prime will soon go up from $79 to $99, as Amazon amasses more and more streaming media customers.

VERDICT: WIN.  In March 2014, Amazon did exactly that.

Like Apple, Amazon is now squarely in the bespoke hardware business, and Prime, like iTunes, is the “fat pipe” to your Amazon Kindle Fire.

VERDICT: WIN.  April 2014, Amazon entered the smartphone market.

Apple pioneered this approach in new media, using iTunes to sell expensive mobile and streaming devices, with iTunes as a “hub” to tie them together.  Even today, iTunes is still a much easier and more frictionless way for non-techie users to manage their music, podcasts, photos, and apps than the Tower of Babel one encounters in the Android world. Netflix had a similar model, but eschewed the hardware business. They partnered with Roku to deliver the set-top box, and built a streaming web interface for watching on mobile devices, ceding those battles to Apple, Google, Amazon, Samsung, and Microsoft, just as Microsoft ceded the hardware battles to PC manufacturers (including Apple) years ago, opting for a “pure software play” in what was a brilliant strategy 35 years ago.

The result is just what Jobs wanted: a public that is less attached than ever to the “hard” content format- paper books and plastic CD/DVD discs for music, movies, and software.

For all the eyeballs and press that Google has, however, they have failed to deliver on the content front.  Google Play Books, Google Movies, and Google Music have been complete flops.  Instead, Google appears to be taking the battle to a new front: owning the last mile of fat pipe.  Google Fiber opens some interesting possibilities for the search giant, but given their past execution on the content front, it’s hard to bet on them, especially with AT&T announcing it’s own gigabit fiber service in 2013/2014 (and hopefully cable companies doing the same).

VERDICT: TBD.  Google Fiber rolled out almost simultaneously in Austin and Kansas City, KS in late 2014, despite KC's 3-year headstart on the infrastructure.  AT&T and TWC paid lip service to Gigabit Ethernet, but have opted instead to milk their existing customers dry on throttled lines and teaser plans, presumably until GoogleFiber becomes ubiquitous.

Even Microsoft appears to be better at subscription than Google.  MS customers are used to paying for their products, so a subscription required to access MS-Office is no surprise.  The question is: is it worth it?  Three years ago, I would have said “No,” but now, I think it might be.

Who’s zoomin’ who?

  • Apple is the undisputed leader in consumer tech right now. Apple is not competing seriously with Microsoft for enterprise users, but is competing with the all the other companies on the consumer front.
  • Amazon is not competing with Google, but is competing with Apple and Netflix, for streaming media and mobile devices.
  • Netflix is not competing with Amazon, Apple, or Google for hardware, but is both competing and partnering with Apple and Amazon for streaming movies and TV (not all media).
  • Microsoft is not really competing with Apple or Amazon or Google in consumer mobile (based on the Surface Team’s budget), but is competing with Google and Apple on paid subscription email, online office suite, and online storage.
  • Google is competing with Microsoft for online office suite, email, and search; with Amazon for ebooks, music, and movies; with Apple for mobile OS, phone and tablets, plus other things like Maps and voice assistant technology.

Here is my radical idea for radically shifting the playing field:

Strange bedfellows

Bill Gates, hear this:  partner with Apple to deliver MS-Office, the premier office suite in the world, as an online offering, complete with email and storage.  Make the documents editable on iOS devices with built-in iOS editors and/or an MS Office app. This immediately boosts the demand for MS-Live subscriptions, while at the same time relieving Apple of it’s burdensome MobileMe/iCloud albatross, and giving it real traction in the enterprise world of Bring Your Own Device (BYOD).   It would also deliver a serious blow to Google Docs, which has received very little attention these past few years, aside from some cosmetic makeovers from recently poached Apple designers.

VERDICT: WIN.  In November 2014, Microsoft released Office for iOS.

On the streaming media front, this would give consumers one less reason to choose Kindle Fire over Apple, and justify the price difference between Kindles and iPads.  Apple’s relationship with Netflix could continue unabated, with Netlix remaining a built-in alternative to iTunes on their Apple TV devices.

VERDICT: WIN.  Amazon's foray into hardware has been a failure, except as a loss-leader for media sales. 

Without such a partnership, I expect Microsoft’s online office suite to flounder, convincing executives that it’s not worth investing in, causing it to fall behind and flounder even more, and eventually wither away a la Zune.  Likewise, Apple’s iCloud will flounder, as the company finds itself trapped like Napolean’s army in the Russian winter: attacked on every front, from Maps, to radio (Pandora), to streaming movies and TV (Netflix/Amazon), to mobile OS (Google/Android), to phones and PC, and a host of computer software. Even Apple, with it’s $100 billion in the bank, cannot long survive death by 1,000 cuts.

My pick for a winner in such a scenario?  Amazon.  On it’s current trajectory, Amazon is growing in the slowest, steadiest, smartest way, even though they are the least profitable of the bunch.

VERDICT: WIN (MOSTLY).  Steve Ballmer's attempt at multi-tiered pricing for Office 365 caused it to stall in the enterprise, where MS has long been dominant.  Feeling the squeeze from Apple's free, included office suite (iWork) and from Google's free (or cheap) online suite for both consumers and business, Redmond finally relented and shipped Office for iOS. Fortunately, Microsoft came to it's senses before the war of attrition with Apple cost them both.

BUT, if Sergei and Larry learn how to negotiate media rights and build a user-friendly interface, they could deliver a deathblow to Amazon and a mortal wound to Apple. Google already has the traffic and the default entry point for most web surfers.  Why can’t they just enter their product or media name, say “bath towels,” “Star Trek,” or “The Voice finalist songs,” and be shown a “buy now” button next to the top results?  Why go to Amazon or iTunes at all?  Apple removed the Google middleman by letting people go straight from iTunes on their computer or phone to the media they wanted; Google could do the same on the Web.

VERDICT: TBD.  Google has made aggressive moves to acquire Apple-like design chops, it still has its fingers in a lot of non-core business pies, including driverless cars, Google Glass, and much more. There may be monopoly concerns in play, but the ability to disintermediate Amazon and Apple seems a unique strength of Google, a muscle that it has yet to flex.

With Bill Gate’s original stake horse in Jobs’ flailing Apple to the tune of $150M some 15 years ago, this move reinforces the symbiotic relationship the two companies have long shared, even as their tech leadership and market cap positions have flip-flopped over the years.  It also keeps the barbarians- Amazon and Google- barred at the gates.

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