The iPad: Apple's Diversion Tips Its Hand

Let's all be perfectly honest. Apple's newest creation is underwhelming, more or less what was expected given the constraints of creating a device to bridge the gap between a phone and laptop. It's a large iPod Touch with a data plan and a great battery. Nothing more, nothing less.

However this product launch is extremely significant in another way. It is the latest data point indicating a tectonic shift in Apple's strategic outlook. The shift initiated with the iPod, was parlayed into the iPhone, and is now diversified into the iPad: Apple's long-term focus is no longer on hardware or software, but rather on content delivery.

Slate.com's Farhad Manjoo gets it partially right when he mentions that Apple has taken another step toward making the computer more like an appliance. But in his endearing wide-eyed way, he misses the greater significance of that very point.

Hardware has become a commodity of sorts in the tech world. Amazon, a leader in online retailing, has its own branded e-reader, the Kindle. Google, the leader in search and web advertising recently slapped its name on the Google Nexus One handset. When any heavyweight can jump into your business at will, your business has become commoditized.

No doubt about it, Apple makes money from iPhone sales and it will make money from the iPad, but it realizes that the strategic high ground in the increasingly crowded, incestuous computer/cellphone/netbook/e-reader/iPod industry no longer lies in the device itself, but rather at the choke-point of content distribution. The device is merely the portal to what users really value: music, TV shows, books, etc.

Did you catch that? The device is just a gateway. The device has become commoditized.

With the iPad, Apple has positioned itself once again as the undisputed king of content delivery. The fact that the gateway itself is another stunning example of Apple design aesthetic is merely a sideshow, a selling point.

Prediction: The iPad's success will be a proxy for the odds of Apple's bet on content. Keep an eye on the rumored Apple/NY Times relationship.  If Apple can revolutionize online news delivery the way it did for music delivery, there is good reason to bet on Apple staying on top of the tech heap long after Steve Jobs retires.

Here's why: This news delivery puzzle is one of the last low-hanging fruits in content delivery. As I wrote previously regarding the NY Times, the journalism business is literally dying for an online content delivery model that makes money. If the iPad can provide that gateway, Apple's app store/content delivery-focused strategy will likely prove to be the most significant tech game changer since PageRank kicked off Google's search engine dominance.

The iPad is about as close as we will ever get to a glimpse of Steve Jobs' hand. Once again he appears to be a step ahead, but in reality he's merely building on something already in place. Apple knows that every time it comes out with a new toy, the rest of the industry has to copy it or else seem out of touch. In this case the toy is a diversion from Apple's true strength.

 Well played, sir.

From Poverty To Prosperity: A Short Review

I recently purchased and read "From Poverty to Prosperity." It is a succinct and insightful take on the profession of economics as it stands today, and I want to review it here.

“For years, the story economists told to describe the world around us was incomplete.”

-Arnold Kling and Nick Schulz

"From Poverty To Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph Over Scarcity"

Economists and word leaders have long struggled with the question of why some countries seem utterly unable to lift themselves from poverty and enter the modern world. Due to the recent earthquake, much attention is be paid to Haiti in this regard. Why is it that no matter how much foreign investment and aid flows in, the vast majority of Haitians have remained mired poverty for so long?



On the other side of the coin, how is it that for other countries such as Haiti’s next-door neighbor The Dominican Republic, progress seems to happen organically, without much outside help? In many cases, the modernization process happens quickly, sometimes taking as little as a single generation to transform an entire economy.

Is it possible to know why? And are these phenomena related from an economic perspective? According to AK and NS, the answers are yes and yes, and the secret lies in how we understand the growth of technology and its economic implications.

Technology can be defined as anything that increases productivity. It is often seen as the economic equivalent of a free lunch, a sort of deus ex machina that lets workers accomplish more with less, allowing the standard of living to rise for everyone.

But technology as an economic phenomenon is not very well understood. Traditional economics tries to explain the world using static models, and because the factors of technological growth are often quite subjective, it gets left out of many economic analyses or treated as a kind of afterthought.


But the omission only serves to highlight the question: Why is it that technological progress is not only increasing, but increasing at an ever-increasing rate?

AK and NS believe they have they answer, and it revolves around the book's central conceptual model, the relationship between hardware and software. The hardware consists of traditional economic inputs (land, labor, and capital). As tangible things, they are limited to fulfilling one purpose at a time. A piece of land cannot both have factory on it and be used to grow wheat, just as a worker cannot not both farm a piece of land and work in a factory.


That is is why the hardware segment of an economy does not keep pace with the exponential growth of the knowledge economy and why foreign aid seems to do so little for economic development. A single computer or factory can only serve one purpose at a time, whereas the design of the computer or factory can be spread across infinite applications.

But this knowledge economy has a very special need without which it cannot take root, and that is the software layer. For example, without clear intellectual property rights and legal recourse for disputes, a modern economy could not exist. This is the dividing line between countries that develop and those that do not.

According to NK and AS, this software layer is made up of a combination of cultural traditions and government/economic institutions that create and align incentives for entrepreneurship and economic growth. It is in "buggy" software that impediments to progress such as corruption, weak property rights, and lack of intellectual property laws occur.

In other words, without a robust, modern software layer, no amount of aid or capital investments will ever address the plight of undeveloped economies. And while many of these insights may seem to like common knowledge, the authors do an excellent job of paring back the layers of the modern economy and showing us how fragile and complex such a thing really is.

All this and more is served over an illuminating, non-technical narrative of the economic history of developed and undeveloped economies. Interspersed between chapters are interviews with leading economists such as Douglass North, Robert Solow, and others who operate just outside the current economic mainstream, but whose ideas in these areas are slowly gaining acceptance.


All in all, From Poverty To Prosperity is an intelligent, well-grounded critique of modern economics and a necessary read for anyone trying to understand the role of technology in the modern economy.

The Scarcity Business Model in an Online World

The beleaguered New York Times and other news outfits like it have been engaged a giant game of industry chicken over the last several years in an effort to see who will make the first move toward charging for its online content.

The stakes are huge. Each company is rightly worried that the first one among them to implement any kind of pay system will be the sacrificial lamb, and it seems the NY Times simply blinked first.

Details are minimal and speculation rampant. Unlike the failed TimesSelect model that was abandoned a few years ago, this model apparently will charge for general usage, rather than premium content.

The more interesting aspect to this development goes rather like this: Will people pay up?

My stance on this issue is the same as when I analyzed Rupert Murdoch’s petulant remarks about Google last month. The heads of the old media companies (think NYT, News Corp., NBC, etc.) are massively discounting the game-changing effect that the Internet has and will continue to have on media business models, some of which predate the last century.

By moving in the direction of paid content on their websites, they are attempting to replicate the Scarcity Business Model in the online world. This business model is based on charging for a good or service in accordance with its availability. Prices are determined based on the laws of supply and demand, and each consumer decides whether of the value of the good is worth its cost.

In the case of a newspaper the physical object is purchased for access to the intellectual content, as there is (or rather, was) no other way to get the information firsthand.

Scarcity is what gives the newspaper or any other physical good its value. But no such scarcity exists in the online world. The physical good is not the only gateway to the information. If you are reading a newspaper, I cannot read the same newspaper at the same time. But online, thousands of people essentially read the same paper or access the same information at the same time.

Clearly the laws of scarcity do not apply here, and therefore any content or media business strategy that takes the Scarcity Business Model for granted in the online world is making a colossal strategic error.

These companies will argue rightly that they deserve to be compensated for the services they provide. They will argue correctly that without some sort of pay system journalism as a profession will cease to exist, and we will all concur that an uninformed populace cannot sustain a democracy.

But the newspapers fail to realize that they are in the newspaper business, not the journalism business. There is no future to the gigantic, unwieldy broadsheet format that has fallen out of favor with the under-50 set, especially now that anyone with Internet access can be an aggregator and distributor of information and play the role of a newspaper without any of the overhead.

A parallel exists in the recent record industry collapse. When companies in this space began to lose money to the digital revolution, they tried every way possible to impede progress. They poured money into DRM and waged punitive lawsuits against their own customers. And like newspapers today, they wailed that without them nobody would make music any more.

Then Apple came along with the iPod and the iTunes store and developed a successful new business model selling music. It then successfully expanded it to movies, TV shows, even rentals, and is expected to make a play for the eBook market next week.

Record companies still exist as a legacy industry of course, but a dying one. This will likely be the fate of the newspapers as well, because someone along the line will hit upon a content delivery system that people will be happy to pay for and the journalism industry will realign itself. We will remember the old pay sites like we remember GeoCities, casualties of the creative destruction that has always driven the free market.

My guess is that the pay system may hold back the tides for now at the Times, but the Grey Lady is in a long-term slide. My prediction is that the Times as we have known it for the last 150+ years will cease to exist by the end of this decade, and the same goes for most of the other old-media companies. And to them, I say good riddance.

De-branding: A Thought Exercise, Part I

It was recently brought to my attention that Starbucks has launched a rather innovative branding scheme. Perhaps it is incorrect to call it a branding scheme in light of what actually happened. Starbucks has in fact opened a store in the Seattle area that is completely devoid of any corporate branding, and plans for more of these “pilot” stores are in the works.

These de-branded stores in reality are likely listening posts for the coffee giant, which has been hit hard by the recession and has suffered from market saturation in recent years.

Starbucks has been losing business to the same local coffee shops that it gobbled down on its way up, and this move is likely a way to study what may be done about that.

I see this as a wise move for Starbucks. Its decline may be part of a long term trend (albeit a slight one) away from massive, sprawling corporations in favor of more ecologically and socially responsible local businesses, but I see few other ways for it re-invent itself.

Aside from corporate strategy issues, I got to thinking of this as a branding issue. Where else might this idea of “de-branding” be implemented? Would it work for a standalone product or would need to be an extension of an established brand? Would the product even need to be physical?

As I talked to friends about it, I hit on products where it might be accomplished, one has already been tried (poorly), and the other has not.

Vodka. Among purists, less is more. Taste, that is. Unlike any other spirit, the perfect glass of vodka is something of an alcoholic nirvana, the blissful absence of almost any flavor.

This Platonic Form of vodka must literally be distilled and filtered down to its essence (usually again and again), and if one considers that from a branding perspective, the logical conclusion is the utter lack of any branding whatsoever.

Clearly though a plain unlabeled bottle is not going to do very well on a crowded bar shelf. The bottle itself must be the brand or logo. As I mentioned, this has been done before.

It is called Crystal Head Vodka and comes in a skull shaped bottle. Dan Akroyd is featured in a series of videos on their website hawking the beverage and there is a back-story worthy of an Indiana Jones film.

But I think Crystal Head missed the point. The elaborate back-story and celebrity ad campaign are the exact opposite of the pure essence that is the hallmark of a good vodka, especially in the premium market segment it is clearly focused on.

I would instead hire an elite design firm to design a simple but iconic bottle that would exemplify the spirit of the beverage inside. (Forgive my blatant pun, if you will.)

This bottle would serve as the packaging, logo, and the entire brand.

Would it work? I expect it would if were launched under the umbrella of a premium label it just might.

Next, a de-branded sportscar........