Apple Watch Pricing Strategy Thoughts

There has been speculation that the price of the 18K gold Apple Watches may be several thousands of dollars higher than the stainless steel versions. John Gruber has written a blog post on how he came to this guess. John Gruber guesses that the 18K Apple Watch Edition will start from $4,999.

To arrive at this number, John Gruber analyses the prices of 18K gold Rolex watches. He finds that they are priced at over $30,000 and so in fact, the $4,999 figure that he arrives at is much much lower that luxury Swiss watches.

This is definitely one pricing strategy that Apple may follow.

However, pricing is a very very difficult topic. There is no single correct pricing strategy. In fact, as you can see on Wikipedia, there are many pricing strategies that one can use (and this article only lists the general ones). John Gruber’s analysis is absolutely correct only if Apple’s pricing strategy is “Market-oriented pricing”.

Let’s see what would happen if Apple chose to use a different pricing strategy.

Cost-based pricing

This is the practice of basing the price on the cost-of-goods. In the Wikipedia article, strategies like Absorption pricing and Contribution margin-based pricing are cost-based price strategies.

If Apple were to follow this strategy, the price differential of a stainless steel/sapphire glass Apple Watch and a 18K gold/sapphire glass Apple Watch Edition would be roughly equal to the cost differential of stainless steel and 18K gold.

What would this price be? What is the cost different between stainless steel and 18K gold?

To understand this, we need to know how much 18K gold is contained in an Apple Watch. We don’t know the answer to this, but I found an article on the Internet that measured how much gold was used in an 18K gold Rolex watch.

“How Much Gold Is Really In A Rolex Watch?”

NewImage

This watch tears down a Men’s Rolex President to find how much gold is used. The results are as follows;

Case ring weights 18.5 grams. Contains 13.875 grams of pure gold. It has a value of $178.43.

Case back weighs 7.21 grams. Contains 5.41 grams of pure gold. It has a value of $69.57.

Bezel weighs 5.30 grams. Contains 3.98 grams of pure gold. It has a value of $51.18.

The bracelet weighs 68.85 grams. Contains 51.64 grams of pure gold. It has the most value at $664.09.

The total value of the pure 24kt. gold in this Rolex President is $963.27.

Since the Apple Watch Edition does not come with a solid gold bracelet, the total value of the pure 24kt. gold in watch would be

$963.27 - $664.09 = $299.18

That’s actually not very much.

Gold prices have risen very significantly (2-3 times) since this teardown article was written in 2006 (probably due to the excessive quantitative easing by the Fed in response to the global financial crisis), so we might actually be looking at a total value of something like $1,000.

This suggests that if Apple follows a cost-based pricing strategy, the price difference between an Apple Watch (stainless steel) and an Apple Watch Edition (18K gold) will only be about $1,000.

Developers

In PCs, smartphones and the Apple Watch, developers play a very important role. This is likely to strongly affect any pricing decisions that Apple will make.

To understand this, take a look at the video of Steve Jobs and Bill Gates at All Things D5 from (15:52). They talk about their collaboration on the original Macintosh on which, not only Apple but Microsoft had bet their future on. Bill Gates mentions that when Steve first came, he had mentioned that the price of the Mac would be much lower than it eventually turned out to be at $2,495. In fact, Steve Jobs fought for the Mac to be prices $500 lower, but lost out to John Sculley.

Why would Steve aim for low price? Because a low price would mean more units would sell, which would mean that Microsoft and other software developers would be able to sell more software and make more money. This would invite more and more developers to write software for the Mac and create a vibrant and healthy ecosystem.

Coming back to the Apple Watch, Apple has to entice developers to write software for it. They have to create a vibrant ecosystem around the watch. This means that they need to sell a lot of units. Maybe not as many as iPhones or iPads, but at least enough to make developers excited about it.

Keep in mind that while Apple may rake in a lot of money from a luxury watch, app developers will not be able to charge a premium for wealthy customers. A billionaire and a person on the street both pay the same few dollars for the very same app.

A luxury watch that will cost more than $10,000 and will only sell to a relatively small number of wealthy customers will not contribute much to the ecosystem.

Tentative conclusion

My guess is that Apple will price the Apple Watch Edition 18K gold models using a cost-based pricing strategy. That is to say that the price difference between the stainless steel model and the 18K gold model will be about $1,000 at current raw gold prices.

The basis of my guess is that Apple does not have to employ the same pricing strategy as the Swiss luxury watch makers. In fact, doing so will harm the developer ecosystem that Apple wants to build up.

The priority for Apple should not be about maximizing short-term profit. It should be about selling large numbers of watches and building the ecosystem for long-term gain. And I’m sure that Apple is fully aware of this because of the near-fatal mistakes during the Sculley, Gassee years.

Apple Pay Momentumn

In a previous post, I described some differences in how Apple Pay handles data relative to Google Wallet, and discussed some implications. I also linked to an article on the New York Times (“Banks Did It Apple’s Way in Payments by Mobile”) that suggested that banks and credit card companies are quite eager to work with Apple Pay.

The interesting thing is, we are hearing about this more and more every day. Banks really do seem to be eager to get on board. For example, the Financial Times has an article titled “US banks race to gain Apple Pay card advantage”.

This kind of activity suggests that Apple Pay may at long last crack the nut on mobile, NFC payments.

Getting the channel this excited is a very, very big deal.

Is Apple Going After Google?

On The Charlie Rose Show, Tim Cook was uncharacteristically harsh on Google, or so it seemed to my eyes.

Some quotes;

Our business is not based on having information about you. You’re not our product.

I think everyone has to ask, how do companies make their money? Follow the money. And if they are making money mainly by collecting gobs of personal data, I think you have a right to be worried, and you should really understand what’s happening with that data, and the companies I think should be very transparent about this.

I’m offended by lots of it.

Tim Cook also mentioned prior to this quite strongly that Apple’s competition is not Samsung but Google. (32min 20sec on this video)

I find this very interesting. Steve Jobs tended to divert attention when asked about his feelings towards Google, although we know for a fact that he was mad at them copying the iPhone with Android. As far as I know, Tim Cook’s words are the most critical I have heard from an Apple executive.

With the launch of iOS8 and iPhone 6, many analysts have observed that the advantages that Android (and Samsung) had over Apple are mostly diminished. Hence at least in the United States, it is very likely that iPhone will take market share away from Android. Apple has also improved its Maps application, and it seems that iOS users are mainly using it over Google Maps. It is also common understanding that Google is paying Apple to keep Google as the default search engine on mobile safari. It looks like Google is quite reliant on Apple as a partner, but that Apple is increasingly gaining a stronger bargaining position.

On the other hand, Apple’s attempts to keep Android at bay through patent litigation has proved to be for the most part unsuccessfull. In some cases the courts have found that Samsung has infringed on Apple patents, and as a result, some features have been removed. This hasn’t however prevented Android from gaining in popularity and market share around the world.

My hunch is that Apple has changed its strategy from simply trying to block Android through litigation, to a strategy where Apple will try to damage Google’s core business and revenue source, that is collecting user data and using it for advertising.

The motivation of such a strategy is quite simple. Outside of its core business of search and advertising, Google consistently tries to undermine a successful business by giving away a similar product for free. This is what they did to Microsoft Office with Google Docs and to the iPhone with Android. They are also aiming to do the same with Chrome OS. As Apple introduces the Apple Watch, Google will inevitably modify Android Wear and give that away for free, which may cause headaches for Apple. Google can do this because it makes so much money from advertising. They use this money to fund unprofitable businesses with the goal of commoditizing that market.

Apple has found that they cannot directly block the free products that Google creates. The patent litigation process takes too much time for it to be effective in the fast changing tech landscape. Instead, Apple might be thinking that preventing Google from earning so much money from search is the better approach.

If this is the case, we may see much more public relations efforts from Apple (and even maybe in concert with Microsoft) to educate the public that Google is collecting and using customer information for advertising purposes, and that we should be concerned. We can also expect Apple to move more aggressively with Spotlight in iOS so as to all but eliminate the need to search on the Internet. It looks like this is going to be done quite forcefully.

It will be fascinating to watch.

Update

On Sept. 18th, soon after the Charlie Rose Show aired, Apple posted a letter from Tim Cook on its web site. It reiterated what Tim Cook said on the show about piracy and about the practices of Google (without mentioning the name). It’s actually not a single letter, but a new privacy section of their website with a few more pages detailing how Apple handles privacy. It is now evident that Tim Cook’s comments on the show were not spontaneous, but was an initiative that Apple had planned for a while.

“A message from Tim Cook about Apple’s commitment to your privacy.”

A few years ago, users of Internet services began to realize that when an online service is free, you’re not the customer. You’re the product. But at Apple, we believe a great customer experience shouldn’t come at the expense of your privacy.

I expect we will be seeing much more comments like this coming out of Tim Cook and Cupertino this year. It will be very interesting if they can take it to the point where Google starts feeling like retaliating.

Apple Watch Strategy

The introduction of the Apple Watch at the Flint Center at Sept. 9th was both similar and different from past product announcements. Some have seem this as a weakness or change within Apple. I see it however as simply a realization and adaptation of the unique challenges Apple faces, as it enters a product category that has been an extremely obvious target, but has proved elusive for both Google and Samsung.

Fashion

Fashion was very much emphasized at the event. In particular, many fashion journalists were invited to the Flint Center to attend the event. You can also see this in the way they introduced the Apple Watch. They almost immediately went to Jony Ive’s video which, as always, focused a lot on the design aspects of the product.

Rather than make the fashion journalists bored stiff with technical details or what features the watch can perform, they went straight to the appearance and feel of the product.

This clearly shows that Apple has placed a very high emphasis on fashion, probably because they hope that will be a strong driver of sales.

Although Apple is a very, very strong brand, its ability to attract fashion conscious customers and to get the distribution channels to behave according to Apple’s wishes is untested. This will be a very large challenge for them.

Developers

The description of product features was done by Kevin Lynch, former Adobe CTO and current vice president of technology at Apple. It was very extensive and they demoed a lot of applications. At the end of Kevin’s talk, he also went into WatchKit, the API for notifications.

Some say that this description lacked focus. That they simply showed a lot of apps without a clear message of what the the unique purpose of Apple Watch was. It is true that the positioning of Kevin’s talk was unusual since it actually preceded Tim Cook’s description of the three pillar features.

The most rational way to think about this is that Apple was showing off what the Apple Watch was capable of, as a way to excite third party developers to create new and exciting apps. That is, the emphasis of Kevin’s talk was not about us but about developers.

Back when the iPhone was introduced, Apple had not prepared an SDK for third-party development, and the App Store had not even been invented. The power of third-party developers to extend and to bring value to the platform had not been fully realized. Fast forward to today, the situation is totally different. Apple recognizes that developers are vital and indeed the key to getting mass adoption of the Apple Watch. In fact, developers are more important than any focused marketing message that Apple may come up with.

Developers are much more important now. Apple obviously and correctly decided that instead of them dictating how the product should be used, they should just lay out all the stuff on the table and let the developers choose what they want to use. Of course Apple added some great features like the taptic engine and the heart rate monitor (which I think is much more capable than the tiny ones that are on Google Wear devices). I think however that Apple realizes that these will be most powerful when they are integrated into third-party apps which, for example, can combine them with social networks.

What this suggests is that Kevin Lynch’s presentation was very much directed to the developer community. Apple is probably counting on developers to expand the Apple Watch platform, and giving them the information that they need as early on as possible.

Mass Market Appeal

Another rather unusual thing that Apple did for the current introduction is that they fed the hype. For example, they let ABC News’ David Muir in backstage after the introduction for an exclusive interview, and naturally ABC News hyped it the previous day.

They also used very strong words like “historical” and Tim Cook has repeatedly mentioned that this event marks a turning point for Apple. The rational explanation for Apple itself fueling the hype engine is that Apple felt that it was important that as many people as possible knew about the Apple Watch on day one.

This suggests that instead of following the usual technology adoption life cycle (enthusiasts -> early adopters -> early majority -> late majority -> laggards) and initially target early adopters, Apple plans to jump start at the early majority.

In fact, that is kind of what happened to the iPad. The iPad didn’t have much of an early adopter phase and uptake was extremely rapid. The iPad may have taught Apple that at its current scale and market position, you don’t have to follow the classical “crossing the chasm” theme; you can take the whole market in a single gulp.

I’m not sure why Apple senses the need to attack the mass market from the beginning. Maybe it’s simply because it thinks it can. Maybe it’s to go so far ahead before Google has a chance to catch up. Maybe it’s related to the fashion push. Maybe it’s because they thing that the Apple Watch is a prerequisite to some other stuff that they have in preparation. I don’t know.

One thing is sure. If they want to keep this hype level as high as it is, it will be a huge challenge for even Apple.

Strategy

Instead of lambasting Apple because the presentation of the Apple Watch did not closely follow in the footsteps of Steve Jobs the Master, it is more constructive to try to understand why Apple chose to diverge from the well trodden path. Of course, this assumes that Tim Cook and his team of truly top-class executives know what they are doing, but that isn’t exactly a leap of faith.

Looking at the sequence and structure of the Apple Watch introduction as I have above, it is clearly obvious that Apple’s primary concern in the fashion aspect. And secondly, it’s about the developers. It’s about what developers will do with the graphics, the sensors and the taptic engine on the phone.

The features that Apple Watch may have outside of simply telling the time, the “reason to exist” as many critics have commented, are at this point only the third priority. That is clearly what the structure of the presentation tells us.

Judging from the presentation structure and sequence, that is Apple’s strategy for marketing the Apple Watch.

It was not a mistake. It was most likely very intentional.

Who Will Sell The Luxury Google Wear Device?

There are so many questions following Apple’s announcements on Tuesday Sept. 9th. A lot of these involve competitor reactions.

Here I would like to touch on who will sell the luxury Google Wear device?

We now know that Apple Watch is going to enter the luxury watch segment with its 18K gold bodies. What will the competition do?

Arguably the best candidate for a well designed and luxurious Google Wear device is the Moto 360 by Motorola (Lenovo). Unfortunately, the attention to detail did not seem to extend to the straps. It may be the most premium Google Wear device, but it clearly wasn’t designed with luxury in mind.

Then who will?

Will it be Samsung? They own the high-end segment of Android smartphones and are well positioned in that sense. The problem with Samsung is that it is hardly a luxury brand. Even the high-end smartphones that it ships have been constantly criticized for a cheap look-and-feel.

Will it be HTC? They have created some gorgeous looking smartphones, but as a brand, they are hardly luxury. The same can be said of LG.

Will it be Motorola? Well the Moto 360 was a nice try. The Moto X however has been a dismal failure.

I tend to think that no current Android smartphone maker is up to the task of creating a luxury watch. They simply don’t have the brand, and it’s very unlikely that they can achieve the detail to attention that is required.

It is more likely that some of the Swiss watch makers will team up with a tech company to deliver a smartwatch. It is very possible that the Apple Watch will eat into the luxury watch segment and steal customers away from the Swiss watch makers. To defend themselves, Swiss watch makers might enter smartwatches, and since the only platform they can use is Google Wear, that is what they will probably use.

I would hate to say “OK Google” to a Rolex watch though. That is so humiliating.

Sales Channel Strategy for Apple Watch

One thing that I am very interested in learning about is, what will be Apple’s marketing strategy for the Apple Watch?

Most of the discussion on the Internet has been about the product. After all, that is basically all that Apple has shown us thus far. However, to gain any serious idea of whether it will sell well or not, we have to understand at least the promotion, pricing and channel strategies.

Here, I would like to touch on some possible marketing strategies;

  1. It is very likely that Apple will extend the distribution channels for the Apple Watch to fashion and jewelry. These are obviously new channels for Apple, and it is unclear whether these channels will be very cooperative.
  2. Apple could possibly repeat the channel strategy that they forced on retailers after the introduction of the Bondi Blue iMac; that is, they might demand that jewelry shops treat the Apple Watch in a very special way with a dedicated display.
  3. Apple already has a very strong brand, but it is not yet associated with watches. It will be an uphill battle into which Apple is likely to dedicate a huge amount of resources. We can expect Apple to work with news outlets to increase media exposure of the Apple Watch, while Apple will also invest heavily in advertising.
  4. Jewelry outlets typically do not have to explain how the products work. Watches do not have many functions, and the functions that they do have not changed much in decades. The precious watches are typically displayed behind glass cases, and only when you ask the shopkeeper to open the lock, can you touch the device. This will not work for the Apple Watch. Customers will have to touch it and to test its wide variety of features to understand how it will suit their needs. There also needs to be a person who can explain it to them. It is very likely that the vast majority of jewelry outlets will not be up to this task. If this is the case, it is possible that Apple will severely restrict outlets and demand that they reserve dedicated space and staff for the Apple Watch.
  5. If getting jewelry outlets to carry the Apple Watch in a sufficient way turns out to be too difficult, then Apple might restrict retail to the Apple Store and online.

All in all, there are many challenges in the channel strategy. It would be ideal if Apple could get jewelry outlets onboard, but that could turn out to be very difficult. Advertising and promotion however should be more straightforward and we can expect a lot of that going forward.

Why the Apple Watch Exists

Following the introduction of the Apple Watch, many people have suggested that it still lacks a reason to exist. That the keynote lacked an explanation of what the purpose of an Apple Watch is. That it lacks a so called Killer App.

This is probably an extremely misleading way to think about how new product categories come to life and subsequently flourish. The idea that the inventors of a new product category have a good idea of how it will evolve and what needs it will fulfill is not supported by history. Apple executives have also repeatedly mentioned how the killer application came only after a product’s introduction, and how success has often been beyond their wildest dreams.

Take the iPhone for example. At the time of introduction, it was marketed as i) a great phone, ii) an iPod and iii) an Internet communicator. Fast forward to today and you find that i) people don’t use smartphones much as phones, ii) they don’t use them much as iPods, iii) they don’t spend time browsing the web very much. Instead they use smartphones predominantly for Facebook, messaging and taking photos/videos, with app money being mostly spent on games. We can also add video viewing. The killer app is nothing like the initial “reason to exist” that Apple presented.

Hence the fact that Apple didn’t convincingly present a “reason to exist” for the Apple Watch is only relevant for the initial marketing push. Although it will affect how strong the initial uptake will be, a “reason to exist” has no consequences for whether it will ultimately succeed long-term.

Therefore, I think that the question “why does it exist?” is completely the wrong question to be asking. That will be answered in the long term by products that may not even exist yet. In fact, when you come to think of it, the definition of a killer app itself almost precludes it from being known at the time of product introduction.

The question should simply be, “what is Apple’s initial marketing push going to be based on?”. “Does Apple have a good strategy for that push?”

From what I’ve seen, Apple’s initial marketing strategy is plainly obvious. It is going to be based less on technical or functional merits and more on the fashion aspect. It will be about creating brand awareness. It will be about creating a buzz, not necessarily in the Internet community, but in the more conventional media. This is probably based on the realization that explaining the functional merits of the Apple Watch is going to take time to win the general public, too much time to sustain the excitement of developers.

And that is why the “why does it exist?” of the Apple Watch, does not exist yet.

P.S.

All other attempts to create a popular smartwatch have failed to date. Interestingly, they have had a clearly communicated “reason to exist”, for what it’s worth.

What If Apple Pay Succeeds?

Similarities and differences

Apple announced its entrance into mobile payments on Tuesday. In many ways it is very similar to the ill fated Google Wallet. They both use NFC technology and they both use software on your smartphone. In terms of security, they are both vastly superior to credit cards and their magnetic strips (or 3-digit security codes). I do not claim to know the details of both systems, but at least superficially, they seem to be much more similar than different.

What seems to be very different is the way they handle privacy issues. Eddy Cue, during Tuesday’s announcement, strongly emphasized that Apple will not store credit card details on the phone, nor will they store transaction details.

We are not in the business of collecting your data. So, when you go to a physical location and use Apple Pay, Apple doesn’t know what you bought, where you bought it, or how much you paid for it. The transaction is between you, the merchant and your bank. It’s fast, it’s secure and it’s private.

This means that Apple cannot use and is not interested in using Apple Pay as a means to collect point-of-sales data.

Obviously, this data is extremely valuable for advertising. Hence for a company like Google that generates the vast majority of revenues from targeted advertising, this data is too important to simply discard. In the Google Wallet Privacy Notice, Google says the following;

When you use Google Wallet to conduct a transaction, we may collect information about the transaction, including: Date, time and amount of the transaction, the merchant’s location, a description provided by the seller of the goods or services purchased, any photo you choose to associate with the transaction, the names and email addresses of the seller and buyer (or sender and recipient), the type of payment method used, your description of the reason for the transaction, and the offer associated with the transaction, if any.

Regarding how Google plans to use the data, they say the following;

In addition to the uses listed in the Google Privacy Policy, we use the information you provide us, as well as information about you from third parties, in order to provide you with Google Wallet services, and to protect you from fraud, phishing or other misconduct. Such information may also be used to assist third parties in the provision of products or services that you request from them.

This basically means that Google will treat your financial transaction data in the same way as they treat other data; it will be used to learn as much about you as possible, and to send you advertisements.

Can Google change its business model?

If Apple Pay is to succeed, it is very possible that Apple Pay’s business model will be the reason. Merchants and credit card companies will be understandably more willing to work with a company that promises to do only a single function, rather than work with a company that could possibly disrupt them in the future. However, this is not what I want to discuss. I am more interested in what would happen if Apple Pay does succeed.

Let us assume that Apple Pay does succeed and the business model plays an important role in it. Since all previous attempts have failed, this will set the standard for mobile payments. Merchants and credit card companies will expect new entrants to abide by store-no-data policies that are similar to Apple Pay.

Google will naturally have a hard time with this. Accepting a store-no-data policy directly conflicts with their basic business model. It will be interesting to see how Google will manage the situation.

Will other companies step in?

If Google hesitates to provide a store-no-data policy mobile payment solution, other companies might step in. For example, Samsung might add a mobile payment feature to their Samsung Wallet app. Samsung has a large share of the high-end Android market, and hence has access to a large proportion of the customers whom are attractive for a mobile payment scheme. They can also incorporate specialized hardware (secure enclaves and/or biometric sensors) which will enhance security.

Moreover, Samsung has no business model conflict in adopting a store-no-data mobile payment scheme. Like Apple, Samsung makes money by selling phones. They make money when their phones are better and have more meaningful features than the competition. In fact, Samsung would very much like to differentiate itself from the Android competition by including any compelling features that Google will hesitate to provide. If they can make money while doing this, that’s wonderful for them.

Other companies may also step in with a different business model, but still abiding a store-no-data policy.

Update

Some other articles that suggest that Apple store-no-data policy is a big deal, but that other companies could technically adopt the same scheme if they were willing (Google does not currently seem to be willing);

“Here’s How the Security Behind Apple Pay Will Really Work”

There are a number of interesting implications here. First, while it may seem that Apple isn’t using any new technology, Lambert maintains that the combined use of tokens and biometric security features distinguishes Apple Pay from others. Second, Apple will not be handling the tokenization — the credit networks like Visa and MasterCard will be doing so. This essentially takes Apple out of the payment process — Lambert said that Apple will be acting “more as a channel and not a party,” and Apple already said in its major product announcement this week that it will not retain any transaction data. With Apple acting as a payment conduit and not a processor, it would already see little data, but Lambert said Apple has put up “some Chinese walls” to further prevent it from gaining access to payment data.

“Google Wallet Is Leaking Money”

For Google, the goal wasn’t to generate fee revenue from the transactions, as banks, PayPal (EBAY), and other companies do. The idea was to collect data on consumer habits and target ads to them. Google pays such high fees to the credit-card companies it works with, though, that it loses money on every transaction, says Osama Bedier, who stepped down as head of Wallet on May 20 and will shortly leave the company.

“Banks Did It Apple’s Way in Payments by Mobile”

“There are schemes that don’t respect and honor the payment networks,” said James Anderson, the senior vice president for mobile product development at MasterCard. “We want to invest in programs that respect our role in the ecosystem.”

Amazon and the Capitalist’s Dilemma

Jan Dawson wrote a great summary of Amazon’s business and gave some ideas on why Amazon might be buying Twitch.

I am very unfamiliar with Twitch, but Jan’s summary of Amazon fits some thoughts that I have regarding Clayton Christensen’s “Capitalist’s Dilemma”. I would like to touch on that here.

I previously wrote a very brief summary of the Capitalist’s Dilemma on this blog.

Not all innovations are equal. In fact, the majority of the innovations that are happening today are detrimental to economic growth. The authors dissect “Innovation” into three separate categories and argue that the one that create jobs (market-creating innovations) is currently being de-emphasized, while the one that eliminates jobs (efficiency innovations) is being highlighted.

Jan Dawson summarizes Amazon’s business as follows;

Essentially all of Amazon’s business rests on the transfer of spending from legacy categories to categories it competes in, whether that’s e-commerce replacing bricks-and-mortar retail or digital content replacing physical content (or even cloud computing replacing premise-based computing). As such, Amazon’s addressable market is directly tied to three factors:

  • the size of the legacy markets it’s seeking to disrupt
  • the degree to which those markets are shifting into categories Amazon competes in
  • the market share Amazon is able to capture.

From here, it is plainly obvious that Amazon’s business (with the exception of AWS perhaps) perfectly fits Christensen’s description of an “efficiency innovation”. That is to say, Amazon’s business eliminates jobs and is detrimental to economic growth.

Unlike Christensen’s “Innovator’s Dilemma”, the Capitalist’s Dilemma will not directly impact a company’s business. In fact, it will usually greatly benefit short term profits. Instead, it will slowly deteriorate the health of the company, leading to long term effects. Even more significantly, it will negatively affect the national economy as a whole.

This suggests that Amazon itself will benefit from its current focus on replacing brick-and-mortar retail. This may even be true in the long term. However, Christensen’s observations predict that the US economy as a whole will suffer.

P.S.

Using the Capitalist’s Dilemma as a lens, it is possible to argue that services like Uber are also mainly “efficiency innovations”. It’s definitely something to consider before singing praises of tech innovation.

Linux-on-the-desktop Pioneer Switching back to Windows

This post recently caught my attention;

“Linux-on-the-desktop pioneer Munich now considering a switch back to Windows”

This is very interesting because it relates to the current growth in Chromebooks and the new Chinese OS that is in development. It tells us how hard it is to move away from Windows.

Let’s look at why Munich decided to go back to Windows;

Schmid describes two major problems. The first is the issue of compatibility; users in the rest of Germany that use other (Microsoft) software have had trouble with the files generated by Munich’s open source applications. The second is price, with Schmid saying that the city now has the impression that “Linux is very expensive” due to custom programming. Schmid also appears to be an Outlook fan, bemoaning the loss of a single application to crosslink mail, contacts, and appointments.

Regarding the compatibility issue, Munich reportedly used LibreOffice on Ubuntu. At least in the open-source world, this is regarded a quite a good cross-platform solution. Munich’s decision suggests that it wasn’t good enough for a large scale deployment.

The question is, does the same apply to Chromebooks as well? I think it might.

Regarding the second issue, it warns us that “free” is not always the cheapest option. It is not always obvious what will cause costs to go up, but we must be aware that it is always a large possibility. I wrote about one example in this blog (“Japan’s Largest University Switching to Microsoft Office 365 from Google Apps (Docs)”).

It would be nice if I could get more information on this.