The Talk Show

51: Amazon First Citywide Change Bank


00:00:00   I feel like you've been on the show many times, but it's like a long stretch now where you

00:00:04   haven't been on.

00:00:05   Yeah, sort of with the new gig, I still was getting the schedule in order, but I feel

00:00:12   pretty good about it now.

00:00:13   But unfortunately, I have to do sort of last-minute things.

00:00:15   It's like, "Hey, I have an opening today, so we can do it."

00:00:19   Has it settled in?

00:00:20   I mean, it's weird.

00:00:21   You work now.

00:00:22   Officially, you work for Google Ventures.

00:00:24   Right.

00:00:25   Yeah.

00:00:26   That was like a holy shit announcement.

00:00:28   Yes, in a way, I guess. But I don't know, it's not that weird. We're pretty well sequestered

00:00:37   away from Google itself, but I can go over there whenever I want to hang out, which is

00:00:44   sort of interesting. But yeah, I mean, day to day, my job is pretty much the same as

00:00:50   it has been for the past two years, which is just sort of being around San Francisco

00:00:54   and meeting up with entrepreneurs here.

00:00:56   Right and trying to scope out good ideas and see you know who needs dough. Yep

00:01:02   But still it has that word Google in it it does

00:01:07   Which is both beneficial?

00:01:10   and

00:01:11   You know it's I won't say it's it's a detrimental

00:01:15   But it's a it can be a little bit of a discussion sometimes when you're talking with especially early-stage entrepreneurs who are worried

00:01:21   that if they take you know if they take money from Google Ventures that may

00:01:25   you know, stop them from doing a day-to-deal with Facebook or something like that.

00:01:30   Right.

00:01:31   And that's not the case, of course.

00:01:33   You know, we invest in a lot of things that are actually competitive with what Google

00:01:36   itself is doing.

00:01:37   And, you know, that's our mandate is really to go out there and find the best stuff regardless

00:01:42   of what it is.

00:01:43   Yeah.

00:01:44   That's a very Googly mindset in a good way.

00:01:48   Yeah.

00:01:49   Yeah, definitely.

00:01:50   So it's been good.

00:01:52   sort of try everything and see what sticks mindset. So you had a piece, and again, just

00:02:02   like with your previous gig, you're still writing at TechCrunch, you're still writing

00:02:08   on Paris Lemon, but you had a great piece this week on Jeff Bezos and Amazon.

00:02:14   Yeah, so, right. Writing is also sort of an interesting thing for me now, because again,

00:02:19   I just have to sort of do it when I have free time in my day, which is hard to do.

00:02:25   It's a lot harder than I would have imagined it was, going from being a full-time writer

00:02:29   to sort of a part-time writer.

00:02:34   It wasn't as easy of a transition, because I was just one of those people who never really

00:02:38   got writer's block, and I could just write about whatever, sort of any topic.

00:02:42   I could just go on and on and on about it, and it was really just sort of trying to rein

00:02:46   and thoughts and make it a coherent piece.

00:02:49   But now when you're doing the day-to-day stuff of going from meeting to meeting and trying

00:02:54   to think about the future of these different startups, and then you try to go back and

00:03:00   start to write and think about big picture things, it's not as easy as I imagined it

00:03:05   would be, which has definitely been something I've struggled with.

00:03:09   But when there's news like this that happens...

00:03:12   So this was a surprise to everyone.

00:03:14   Jeff Bezos buying the Washington Post.

00:03:18   It hits whatever time it was, you know, midday a couple days ago.

00:03:24   And it's something like that where I start to feel like my old self again because I just

00:03:28   like, I have so many thoughts about that and that's so interesting and fascinating.

00:03:32   And so instead of kind of opening up the WordPress or whatever, instead I immediately now go

00:03:38   to Twitter and just start tweeting about it.

00:03:40   And then sort of the back and forth there sort of gets me ideas as to what I should

00:03:45   write about.

00:03:46   And so for this particular topic, it wasn't so much about Jeff Bezos buying Washington

00:03:51   Post because I don't really know the backstory of that.

00:03:54   I don't actually know why he did that.

00:03:55   I think it's fascinating.

00:03:57   It could be a giant disaster.

00:03:58   It could be great.

00:03:59   I don't really know.

00:04:00   But I realized that so many people kind of snarkily making the references to Amazon's

00:04:08   overall business model.

00:04:09   Of course, Amazon didn't buy Washington Post,

00:04:10   Jeff Bezos did, but the same idea

00:04:12   where Jeff Bezos is a great owner

00:04:14   because he doesn't care about profits.

00:04:15   And I even made that joke too.

00:04:16   And it's like, but people like really get into that.

00:04:19   And so I thought that that would be a good emphasis

00:04:22   to start writing about sort of my change in mentality

00:04:26   about Amazon, I guess, over the past year.

00:04:28   - Yeah, I'm right behind you, really, on that.

00:04:31   I think you thought, and your piece, I really liked it.

00:04:34   And it kind of clicked for me 'cause it's,

00:04:38   Like I said, I was behind you on this,

00:04:40   where I was sort of having the same thoughts,

00:04:43   but I hadn't put them together.

00:04:45   And I thought your piece put it together in the same,

00:04:48   it connected the same dots in my head

00:04:50   that had been floating around.

00:04:52   - Yeah, so thank you.

00:04:53   I think we've all, and I don't know,

00:04:58   I don't wanna speak for everyone,

00:04:59   but for me in particular,

00:05:01   obviously a lot of us write a lot about Apple,

00:05:02   or have in the past.

00:05:04   And there's a way of thinking about Apple

00:05:07   that is different than a lot of companies, of course,

00:05:09   as you know better than anyone.

00:05:11   But there's also, I feel like there can be an issue

00:05:15   with that because Apple in many ways is very straightforward

00:05:20   when it comes to business, right?

00:05:21   They make products that they want to sell for money

00:05:26   at a profit and that earns them a lot of money

00:05:29   and that's great.

00:05:30   Of course, it's more nuanced than that.

00:05:31   They have a lot of other businesses.

00:05:32   They have iTunes, et cetera, et cetera.

00:05:34   But just looking at a high-level picture,

00:05:37   it's pretty straightforward what Apple does.

00:05:39   And I think Amazon is not straightforward at all,

00:05:42   and that's why a lot of us were very confused

00:05:44   as to like, how is this company, you know,

00:05:47   not only continuing to do well, but to thrive,

00:05:49   certainly in the stock market, and we can argue,

00:05:51   you know, whether that's a meaningful metric or not.

00:05:53   But, you know, it's a bit confusing

00:05:56   when you look at it at first.

00:05:57   - Yeah, and I think, I've said this many times

00:06:00   over the years, that in a lot of ways,

00:06:01   especially as a business, Apple is so simple.

00:06:06   even though they're literally the biggest company in the world or second at Exxon or

00:06:11   whatever but you know certainly you know massive corporate entity by any measure but they're

00:06:18   actually fundamentally simple as a business like you said they make products that people

00:06:22   buy and do it you know for a profit you know set a price that people are willing to pay

00:06:28   that significantly higher than the cost it takes to make the product and it stands out

00:06:34   They stand out in technology because there aren't a lot of other companies making computer-type

00:06:42   devices that keep it so simple and that do it so successfully.

00:06:47   But in other businesses, it's as old as any business.

00:06:52   That's the way businesses always have worked.

00:06:54   Right.

00:06:55   Especially, yeah, with the luxury brands.

00:06:57   That's the good analogy of a luxury car maker, luxury watch maker.

00:07:03   They're selling things more expensively than you can get another version of a similar product,

00:07:12   but they're doing it with quality.

00:07:14   And so people are willing to pay for quality.

00:07:16   Right.

00:07:17   Or, you know, or like, you know, and the luxury thing can be a little distracting because

00:07:21   a lot of times you start thinking about, you know, like, I mean, in retail they're often

00:07:25   compared to Tiffany & Company because of the profit per square foot, revenue per square

00:07:29   foot.

00:07:30   Right.

00:07:31   off-putting because Tiffany sells stuff that very few people buy. I mean, relative

00:07:37   to Apple. You know, it's this weird intersection between... it's like

00:07:41   affordable luxury. It's like mass market luxury. You know, maybe a good

00:07:46   comparison would be like Nike, where, you know,

00:07:50   Nike sneakers cost more than average sneakers, but they're not...

00:07:57   almost anybody, very many people can and do buy Nike sneakers.

00:08:02   - Yeah, that's a good thought.

00:08:04   I actually, I would be interested to know

00:08:06   what the margins are on Nike shoes.

00:08:09   I have no idea.

00:08:10   I assume you're right though,

00:08:11   that they're making a pretty healthy margin

00:08:13   on selling those shoes,

00:08:14   'cause they do sell them at a markup from say,

00:08:17   like New Balance or something.

00:08:20   And yeah, that's a good way to think about it, I think.

00:08:23   - And then there's certainly,

00:08:26   I probably, much like Apple, market share wise,

00:08:31   it's not a majority, most sneakers aren't Nike.

00:08:33   I mean, most people probably just buy discount sneakers,

00:08:36   just by counting all six billion people on the planet

00:08:39   and what shoes are on their feet.

00:08:41   - Right.

00:08:42   - But it is, it's a simple business.

00:08:45   And Amazon, and the other parts of Apple's business,

00:08:48   stuff like iTunes and stuff like that,

00:08:50   which is not quite as simple as make a product,

00:08:53   sell it for a profit,

00:08:55   is not a significant part of Apple's business.

00:08:59   - Yeah, though it is interesting that,

00:09:01   it was a few quarters ago it happened, right,

00:09:03   that iTunes passed, iTunes revenue I think,

00:09:06   passed Mac revenue, is that right?

00:09:09   Is that where it is now?

00:09:10   - It's possible, I think so.

00:09:12   - Overall stuff, including App Store and everything,

00:09:14   something like that, yeah.

00:09:16   - But I still think it's up in the air

00:09:19   and they don't break it down, I mean,

00:09:21   they're fairly open in their financials

00:09:23   compared to most other companies,

00:09:24   but they still don't break a lot of stuff down.

00:09:26   But I think Horace Dejou has made the case

00:09:29   that he thinks that iTunes,

00:09:31   even though the revenue's gotten very high,

00:09:33   it's still effectively a break-even business.

00:09:35   - Right.

00:09:37   Which, yeah, and so we could talk about,

00:09:40   obviously Horace had a piece sort of countering mine,

00:09:43   which I found interesting,

00:09:45   and I felt like he got mad at me last night on Twitter

00:09:48   when I sort of said,

00:09:50   "Oh, I don't really understand what he's going after,

00:09:52   But I'm going to debate it with you on this podcast.

00:09:55   And so he sort of responded.

00:09:57   He thought that me using quotes like anti-Apple

00:10:01   was suggesting that I was sort of making fun of his stance, which wasn't really

00:10:07   his stance, which was my stance.

00:10:08   And there was some confusion there.

00:10:09   But I actually do think that Amazon, in many ways, is the anti-Apple.

00:10:13   And he does not at all, it seems like.

00:10:15   Or he thinks it's not that cut and dry.

00:10:18   that there's, I think, not to go too deep into what his thinking is on this, because

00:10:25   he should speak to that himself, but from reading his post, my sense is that he feels

00:10:30   like it won't be as easy for Amazon to "flip the switch" and turn to a profitable company,

00:10:37   which was sort of one of my main points.

00:10:40   Right.

00:10:41   Yeah, I think it just, it's not a disagreement fundamentally.

00:10:45   I think it's a disagreement over what aspects of the company you want to say are opposite each other

00:10:50   Yeah, that's that's right, you know, and if you just look at the desire to turn

00:10:55   a

00:10:57   Profit a grow hopefully a growing profit each quarter

00:11:00   They are opposite because Apple's goal clearly is to turn a profit a large profit each quarter

00:11:08   And in the long run, you know have that profit continue to stretch

00:11:13   Whereas Amazon has never really endeavored to do that.

00:11:16   Right. But I think we're overthinking this in some ways, I believe. Apple, again,

00:11:25   straightforward business. Amazon, seemingly not so straightforward, but it's also like,

00:11:30   if you go back and read the Jeff Bezos shareholder letters from the beginning,

00:11:34   sort of in the late '90s, right, when they went public, there's a lot of interesting

00:11:40   interesting stuff in there because he basically lays out his vision for the company in the

00:11:47   most high level terms in that they're going to sell things at as low of a price as they

00:11:55   can to benefit the customers and they realize that this will sort of hurt their margins

00:12:01   and hurt their potential profit.

00:12:03   from time to time, you know, and he said this, they will have to sort of, again, not to use,

00:12:10   flip the switch, but more or less that, that they'll check in, I think is what he would

00:12:15   say.

00:12:16   They're going to check in to make sure that they can actually still make a profit when

00:12:20   they need to.

00:12:21   And the problem now is that we haven't seen that in a long time, right?

00:12:24   Like this last quarter, Amazon actually lost money.

00:12:28   they posted a loss for the quarter.

00:12:31   And previously it's been very small profits, if any,

00:12:35   certainly compared to Apple.

00:12:36   I mean, we're talking of single digit millions,

00:12:39   tens of millions, while Apple's making double digit billions

00:12:43   in some quarters in profit.

00:12:45   And so Amazon actually lost money last quarter.

00:12:49   And so we're trying to figure out,

00:12:54   are they ever going to be able to make a profit?

00:12:56   But again, you know, many, not even that long ago,

00:13:00   several years ago, they were making some pretty good profits

00:13:03   off of much less revenue that they're at now.

00:13:05   The revenue, of course, keeps growing over time.

00:13:07   And, you know, to go back to Horace's point,

00:13:10   he thinks that it's going to be hard to flip this switch.

00:13:12   And I do agree with the overall sense that it could be hard

00:13:16   just because you don't know what's coming down the road.

00:13:19   There could be a competitor that comes around

00:13:22   and not to use the buzz phrase, but disrupts Amazon,

00:13:26   and they won't see that coming,

00:13:28   and they're so focused on kind of building out

00:13:32   that they're not focused on the right things.

00:13:34   But I do think that that severely downplays

00:13:39   some of the innovation that Amazon could do.

00:13:42   I think a good example of that is

00:13:44   what they've done with Amazon Prime.

00:13:46   So they now have a lot of people paying a recurring fee,

00:13:50   a yearly fee for products.

00:13:52   And when you just think about their business,

00:13:55   if people are paying for something at a razor thin margin,

00:13:59   of course that doesn't seem like the best business

00:14:02   to be in from a profit perspective.

00:14:04   But they have all these people paying Amazon Prime now,

00:14:07   which is sort of interesting because that has,

00:14:09   while not infinite margins,

00:14:11   you can assume that that has very good margins.

00:14:13   - I don't know though because I'm a Prime subscriber,

00:14:19   I guess you call it a subscription.

00:14:22   But I can't help but think that over the course of a year, I make my prime...I forget what

00:14:28   we pay.

00:14:29   Is it $100?

00:14:30   I don't know.

00:14:31   It just keeps renewing.

00:14:32   I think it's $80 and now it's $100.

00:14:35   Yeah, that sounds about right.

00:14:37   But I think that we get more than $100 worth of shipping out of it.

00:14:44   This is another thing.

00:14:45   When you're at the scale that Amazon is at, shipping costs are relative.

00:14:51   So Amazon is building all this infrastructure out to build these warehouses all over.

00:14:54   And now that there's the new taxes in place for internet taxing, they can actually build

00:14:59   warehouses in somewhere like California, where they couldn't before, right?

00:15:02   Because you couldn't have any physical space in California, otherwise they would have made

00:15:08   you collect sales tax there.

00:15:09   And so now that they've come to that agreement that they are going to collect sales tax over

00:15:13   the internet, now Amazon is starting to build warehouses all over the place that they didn't

00:15:17   have before.

00:15:18   And so when they do things like build a brand new warehouse right outside of San Francisco,

00:15:25   they can, you know, the cost of delivering to San Francisco of course goes way down.

00:15:29   And so this is sort of the game Amazon is playing.

00:15:33   I do think that you're right that there are a lot of people, and certainly you're a power

00:15:38   user of Amazon Prime and I am too, and there are a lot of people who are probably, the

00:15:43   the margins aren't as good for Amazon and Amazon Prime.

00:15:45   But I would imagine that there's a lot of people

00:15:47   who buy a couple things a year,

00:15:49   and they're making quite a bit

00:15:51   of a substantial gain from that.

00:15:53   - I mean, I'll do stupid things.

00:15:55   I'll do things, 'cause I know it's Amazon,

00:15:57   and so I know I don't feel bad for them.

00:16:00   I don't feel like I'm taking advantage of them.

00:16:02   But if it was like a mom and pop business,

00:16:04   I would never do it.

00:16:05   Like if it was just like a small business

00:16:08   that happened to offer the same shipping

00:16:11   offers that Amazon does, I wouldn't do it.

00:16:15   Like a week or two ago, I bought a little tiny screwdriver.

00:16:20   I just needed like an eyeglass size screwdriver.

00:16:27   And so I bought one on Amazon for like $3

00:16:31   and had it sent to me on Prime shipping for free.

00:16:35   I mean it's absurd, I mean like it's like super low cost.

00:16:40   I mean, I would never do that if it was like a small business.

00:16:44   I would wait and waited till I needed three or four things

00:16:49   and then batch them all together.

00:16:51   - And that sounds ridiculous, right?

00:16:54   It sounds like ridiculous that Amazon would in any way

00:16:57   allow you to order a $3 thing and let you get,

00:17:00   you know, not pay shipping for it.

00:17:01   But at the same time, because of the scale

00:17:05   Amazon operates at, they probably have, you know,

00:17:07   say, a thousand trucks going around to your area

00:17:12   at any given week or something,

00:17:15   and they just happen to have extra space on it.

00:17:17   So because you're using the Prime thing,

00:17:19   you're not doing overnight,

00:17:20   which of course you have to pay extra for,

00:17:23   they'll be able to find room on one of those trucks

00:17:26   that's just unutilized right now.

00:17:28   - Right, I would probably be surprised

00:17:32   at maybe how efficient their shipping is

00:17:36   and how little it does set them back to ship to me for free.

00:17:40   - And remember that they, with the purchase of Kiva

00:17:42   and they're doing some other things,

00:17:44   this is all, a lot of this process is completely

00:17:46   automated now, where they just have robots

00:17:48   going around their warehouses and picking up

00:17:50   your mini screwdriver and putting it in a truck

00:17:54   and that's it, and there's no, there's very little

00:17:56   human cost and their business is pretty interesting

00:18:00   at this scale.

00:18:01   - And I have to admit, I've always thought

00:18:04   point of Prime, I mean and maybe there are for some people it actually is very

00:18:08   profitable because they pay the 80 bucks and they don't use up 80 bucks worth of

00:18:13   Prime services right in a year and so that's just free money for Amazon but

00:18:19   I've always thought it was a way to sort of encourage loyalty that there's like a

00:18:24   you know once you pay for Prime you feel like well I'm gonna look at Amazon first

00:18:28   because I you know I can get Prime shipping yep and I do think that that's

00:18:33   That's right. I would imagine, you know, I just brought up Amazon Prime as one example.

00:18:36   I have no idea what the actual margins are on that. But I do think you're probably right

00:18:42   in that they view it, well, maybe not a loss leader. And I do think, like, off of certain

00:18:48   people they're probably making a pretty good profit off of that. But they do view it as

00:18:51   a way to just keep people coming back and keep people buying more and using Amazon more.

00:18:56   Because I've always thought that was the point of, like, the way that, like, at a Sam's Club

00:19:01   or I forget some of the other big box retailers

00:19:05   where you have to be a quote unquote member.

00:19:07   - Right. - But to be a member,

00:19:08   you just pay, I don't know, 25 bucks a year

00:19:10   or something like that.

00:19:11   But I've always thought it was, you know,

00:19:13   sure the membership fees are nice,

00:19:17   but I don't think that Sam's Club runs on membership fees.

00:19:21   I've always just thought that there's like a psychology

00:19:23   to it where once you're a member and you have paid,

00:19:25   you feel like, well hell, if I'm gonna buy toilet paper,

00:19:27   I'm gonna go to Sam's Club because I'm a member.

00:19:30   Yeah, right.

00:19:32   And that's, so that plays into the idea that Amazon's business, at least at first, I think

00:19:39   Amazon again is super complicated now because they're doing so many things.

00:19:42   I mean, we haven't even talked about like AWS and sort of their digital services, which

00:19:47   are really fascinating.

00:19:48   But from the beginning of Amazon, of course they started selling books, but even when

00:19:53   they're just trying to sell sort of everything online, of course everyone recognizes that

00:19:58   that what they're trying to go after is basically Walmart,

00:20:00   where Walmart has an insane amount of revenue

00:20:04   and relatively low profit compared to that,

00:20:07   but that doesn't matter because the revenue is so high

00:20:09   that the profit is also high,

00:20:10   even though the margins are so bad on that.

00:20:13   So Amazon, by doing things like Amazon Prime

00:20:16   and keeping people coming back

00:20:17   and just keeping on goosing the revenue,

00:20:20   the profits will go up.

00:20:21   The thing that of course we're talking about now

00:20:24   is the fact that the profits aren't going up

00:20:25   because they're spending so much of this money

00:20:27   other things.

00:20:28   Right.

00:20:29   All right, let's take a time out.

00:20:30   We have a couple of sponsors this show.

00:20:31   Let's get one out of the way and then we'll keep going on Amazon.

00:20:35   I want to thank our first sponsor.

00:20:36   It's Squarespace, long time friends of the show.

00:20:39   Squarespace, you know, of course, is the all-in-one platform that makes it fast and easy to create

00:20:44   your own professional website or online portfolio.

00:20:47   I'll tell you right now, you can go there with the order code, talk show eight, talk

00:21:02   show and then the digit eight and you'll save 10%.

00:21:05   Just go to Squarespace, no more funny URLs, just go to Squarespace and squarespace.com

00:21:11   and you can find out more with that code.

00:21:14   constantly improving their platform with new features new designs better support

00:21:19   their support is incredible 24 hours I don't even know how they do it 24 hours

00:21:23   seven days a week they've even won awards for their customer support

00:21:28   something called a gold Stevie award they just got what is it what does it

00:21:34   cost it cost starts at just eight bucks a month and that includes a free domain

00:21:38   name if you sign up for a year they have over 20 templates to choose from they're

00:21:43   beautiful their templates have won awards they just want a webby award this

00:21:47   year for their their template design so go to squarespace.com find out more and

00:21:53   use the code talk show 8 and you'll save 10% so back to Amazon and profits yes so

00:22:10   My summary, and this was, I hadn't had this thought until I read your piece, but

00:22:15   my summary is that Bezos has set Amazon up from an investor perspective.

00:22:21   That profits are sort of like a will of the wisp, and it's always, investors

00:22:27   believe in Amazon, or Amazon's investors certainly do, and the revenue growth is

00:22:34   certainly there, right? It's, you know, maybe one quarter over another

00:22:38   there have been dips but on a pretty steady pace since the company was founded in 1994

00:22:44   revenues have grown at a remarkable rate like you know it used to be hey Amazon might someday

00:22:51   be a major retailer on the scale of like Walmart and Target and you know physical world retailers

00:22:59   like that and you know in the 90s some people thought that was nuts I mean some people truly

00:23:04   thought hey come on nerds will buy stuff online but normal people aren't going to buy stuff

00:23:08   stuff online. That's totally turned out to be true. And so that sort of investor faith

00:23:14   from a long time ago has panned out. The revenue growth is there. But I think Bezos, I think

00:23:21   that, and I don't want to put words in your mouth, but I think this is the point you're

00:23:24   sort of making, is Bezos has sort of set up the expectation that profits never have to

00:23:30   come now. They only have to potentially come in the foreseeable future.

00:23:36   Right. And I do... So this is why I think Bezos is sort of... Well, I mean, I do think he's a

00:23:44   business genius, certainly, but I think he's sort of underappreciated. And I think that's what we

00:23:49   were seeing with the Washington Post stuff because everyone's like, "Why would he do this?" And maybe

00:23:52   he doesn't have a plan for Washington Post. Again, I don't know. But when people are sort of saying,

00:23:57   "Oh, crazy guy who just doesn't care about profits buys a wallpaper company." I think that...

00:24:03   So when you look at his history, he worked on Wall Street, and he understands how this works,

00:24:08   maybe better than most other CEOs do because they don't have that experience. Remember,

00:24:12   he didn't start Amazon until he was 30. He ran a hedge fund in his 20s.

00:24:16   Right, a hedge fund. So he totally understands, or you can assume that he totally understands

00:24:20   Wall Street. And so I think what we've been seeing the past few years, which is really interesting,

00:24:26   When compared to Apple, Apple has just done so much,

00:24:30   so good of business, the profits.

00:24:34   The couple quarters, they've hit $13 billion

00:24:38   and the only thing that's comparable to that

00:24:40   are the oil companies, right?

00:24:41   I mean, that's just, that's amazing.

00:24:43   And it's not even, the oil companies

00:24:44   often don't do that well.

00:24:45   It's like their three best quarters

00:24:47   stack up against Apple's best quarters now.

00:24:50   And so those profits are huge.

00:24:54   And while they were showing those giant profits

00:24:57   and the profit growth, more importantly,

00:24:58   and the revenue growth, Wall Street was loving Apple,

00:25:01   pushed the stock up to past $700 a share, right?

00:25:06   Now that the growth is slowing,

00:25:09   even if the profits are still pretty good,

00:25:10   you know, I forget what it was last quarter,

00:25:11   eight billion or something like that,

00:25:12   I mean, that's still insane for almost any company,

00:25:17   the growth is no longer there.

00:25:19   And the problem, and sort of one of the points

00:25:22   that I made in my post,

00:25:23   which I think people just don't really think about.

00:25:26   It's so obvious that people don't think about it.

00:25:29   Apple's problem with Wall Street

00:25:31   is that they're looking for future potential

00:25:33   and the fact that the iPhone

00:25:35   was such an incredibly good business

00:25:37   and still is for Apple

00:25:39   that it's gonna be almost impossible, I think,

00:25:41   for them to find a business that's similar to that.

00:25:44   Maybe I'm wrong, I hope I am.

00:25:45   I hope that they come out with some kind of crazy new device

00:25:49   that no one is thinking about.

00:25:51   But I think even with the rumored television stuff and the watch, I think that they'll

00:25:56   be hard pressed to get the sort of profits that they do off of the iPhone because of

00:26:02   the way the unique market that the iPhone's in, the smartphone market, especially in the

00:26:08   subsidized markets where they're getting paid so much money upfront for these devices.

00:26:13   And so that's going to naturally, if you can't get another iPhone-like product, the growth

00:26:21   is naturally going to come down.

00:26:22   And so when people talk about has Apple peaked,

00:26:26   you can maybe make an argument that they have

00:26:28   in terms of revenue and profit growth

00:26:30   just because the iPhone was such a good business.

00:26:33   Amazon is the opposite, right?

00:26:35   Where Bezos is playing this,

00:26:38   and just to go back to Apple for a second,

00:26:40   so Tim Cook, the operator,

00:26:43   he understands how to make the machine

00:26:45   as well oiled as possible.

00:26:46   And as soon as he took over for Steve Jobs,

00:26:49   both on an interim basis and then on a permanent basis.

00:26:53   You know, people don't give him credit,

00:26:55   but the stock went crazy after Jobs passed away

00:26:59   and Cook is the CEO and the man in charge.

00:27:01   That's when it did the run up to $700 a share

00:27:03   and Apple sort of hit its peak.

00:27:05   And then everyone talks now, like,

00:27:07   "Oh my God, he's lost so much value."

00:27:09   But he created a lot of that value.

00:27:10   I mean, it was under him that that value was created.

00:27:12   And so Bezos, though, is playing it the opposite way,

00:27:18   where rather than focus on the profit,

00:27:22   of course you want revenue growth,

00:27:24   especially in the business that Amazon is in,

00:27:27   but rather than focus on the profit

00:27:29   and showing investors what,

00:27:31   showing them your hand basically,

00:27:33   he's focused on trying to ground that profit

00:27:38   into the ground and make it almost break even.

00:27:41   - Yeah, I totally agree.

00:27:44   And it's Matt Iglesias who writes on economics at Slate

00:27:49   has commented on Amazon several times.

00:27:52   And what was his phrasing that he called them,

00:27:54   that effectively that they run as like a--

00:27:57   - Charitable.

00:27:58   - A charitable foundation for the benefit of consumers.

00:28:01   - Right, which is funny.

00:28:04   I mean that's a really funny way to think about it.

00:28:05   And I used to totally agree with that.

00:28:08   But you have to also remember that Amazon's business,

00:28:12   and I think it was Eugene Way who used to work at Amazon,

00:28:15   pointed this out in a really good way a few months ago.

00:28:19   Remember that Amazon, because of the business they're in,

00:28:22   they have cash constantly flowing in,

00:28:25   and yet they don't have to actually pay for things

00:28:28   necessarily right away.

00:28:29   So they have this sort of interesting buffer

00:28:32   that other companies do not have.

00:28:34   And that's why when you talk about free cash flow

00:28:37   and how Amazon could possibly keep operating

00:28:39   and bring in money when they're losing money.

00:28:42   It's because their business is unlike sort of any other

00:28:46   where they actually do constantly have a flow

00:28:49   of cash coming in and if that dried up,

00:28:52   they would be, yeah, there would be problems,

00:28:54   but that's not drying up.

00:28:56   Certainly things like Amazon Prime are probably helping that

00:28:58   where people just keep buying stuff.

00:29:00   And so they have this cash that they can use for things

00:29:02   where they don't need to focus solely on making a profit.

00:29:07   There's the classic '80s Saturday Night Live fake commercial for the First Union Change

00:29:17   Bank.

00:29:18   I do remember this, yes.

00:29:19   I remember Kevin Nealon.

00:29:21   And the gist of it was it's a bank where all they do is make change.

00:29:26   And they're like, "Hey, you can come in with a dollar bill.

00:29:28   And if you want 20 nickels, we'll give you 20 nickels.

00:29:32   You want 10 dimes, you can get 10 dimes.

00:29:35   You want half nickels, half dimes?

00:29:37   We can make that happen.

00:29:38   And it was funny.

00:29:39   And then, you know, the punchline was people say, "How do you turn a profit?

00:29:46   How do you make money?"

00:29:48   Volume.

00:29:49   Right.

00:29:50   Right?

00:29:51   And that, it's funny.

00:29:53   And that, I think, has sort of been the knee-jerk.

00:29:56   And it has been mine, the knock against Amazon, you know, that, you know, if you're breaking

00:30:01   even, there is no profit.

00:30:03   But you could actually turn a profit as a change bank if you can hold the money before

00:30:09   giving them their change.

00:30:10   Right?

00:30:11   Exactly.

00:30:12   And that's like, you know, I think Amazon, wasn't that the piece you're citing from the

00:30:16   guy who worked there, that they hold some of that money for up to 90 days?

00:30:19   Right.

00:30:20   That they only have to pay like the book distributors, like if you buy a book.

00:30:23   They pay at the end of the quarter.

00:30:25   And in the meantime, they've held that money and they can earn interest on it and do all

00:30:28   you know, you actually can make money as a change bank if you hold the money for 90 days.

00:30:33   Right. It's an interesting way to think about it. Like maybe a more simplified way that like,

00:30:38   you know, someone just on a day-to-day can think about it. Like imagine that you're,

00:30:42   you pay a, you have to pay a down payment on your rent or you have to pay

00:30:49   basically a holding fee or whatever to get an apartment, right? And so you give that to your

00:30:56   landlord and your landlord then has that money he could put it in a in his checking account

00:31:01   and he's earning interest on that money so it's like your money is being used to make

00:31:06   him more money because eventually he's going to give that money to you back unless you

00:31:10   trash your apartment or whatever but he is earning money off of off of the money that

00:31:15   you've given him so there's so there's the interest component of it which I don't I actually

00:31:19   don't know how much Amazon does of that I assume that they're that they have you know

00:31:23   some money invested and they're making interest off of that.

00:31:25   But yes, and then there's also the free cash flow component

00:31:28   where they can hold onto this money and use it for whatever

00:31:31   they want to use it for until they have to pay it

00:31:35   90 days later.

00:31:36   But at that point, they already have other money

00:31:39   that has come in for the same purpose.

00:31:41   So I know that this is fairly complex.

00:31:48   And this took me a little while to understand how exactly this

00:31:51   could possibly work.

00:31:52   Because it almost seems like it's such an interesting idea that it seems like a scam, right?

00:31:56   Where it's like they don't actually...

00:32:00   They're not selling something and getting money and then distributing it.

00:32:05   Rather, they're selling something, they're getting the money,

00:32:08   and then they're distributing what they already took the last money for, right?

00:32:14   It's like... it's a pretty complex idea, but this is sort of the genius of Bezos

00:32:19   that he realized that you could do this.

00:32:20   And certainly that's not all of Amazon's business.

00:32:23   They have many different, you know, AWS and stuff where they can't do this kind of stuff.

00:32:27   But in the retail side of things, there are some interesting ways that they can make money

00:32:34   out of seemingly having no profit, right?

00:32:38   Yeah, it's totally interesting.

00:32:42   Isn't the story with AWS that they...

00:32:45   It wasn't like they really...

00:32:46   I mean, who knows how much, you know, you have to take their public statements with

00:32:50   a grain of salt, I guess, because maybe they want to be a little cagey about what they

00:32:54   say publicly.

00:32:55   But publicly, they've said more or less that they've built up a lot of infrastructure so

00:33:00   that they could handle their peak traffic, which affect, you know, for Amazon, the retailer

00:33:05   is like holidays, you know, like the Thanksgiving night and the day after Thanksgiving and stuff

00:33:10   like that.

00:33:11   So, they want to be able to handle that.

00:33:12   They don't want the site to crash on Monday, the day after Thanksgiving when everybody's

00:33:16   trying to order.

00:33:19   And so they've built out an infrastructure to handle that level of traffic smoothly.

00:33:24   But then 355 days a year, they don't need it.

00:33:29   It's sitting there unused and they've more or less had the idea, "Well, why don't we

00:33:32   sell it to people?

00:33:33   Why don't we let other people take advantage of this?"

00:33:36   Yeah, I think you're right in that that was the initial impetus behind how they do it.

00:33:40   I don't actually know that full story,

00:33:42   but I think that that, I believe that that's right.

00:33:44   But now I imagine that they realize

00:33:47   this is actually a pretty big business,

00:33:48   and so we should just have these sort of,

00:33:51   we should just run this as a separate business,

00:33:53   aside from having this excess inventory of storage

00:33:58   for when, or capacity for when it's not a holiday season.

00:34:02   And I think that they now recognize

00:34:05   how big of a business this actually is.

00:34:07   I mean, think about, you know,

00:34:09   all I do all day is talk to and meet with startups.

00:34:11   I mean, the number of them that are built

00:34:13   on top of Amazon's cloud infrastructure is amazing.

00:34:16   I mean, I don't know what the actual percentage is,

00:34:19   but it's way over 50% for sure,

00:34:22   at least in startups in San Francisco

00:34:25   that are built on top of Amazon in some way at least.

00:34:28   And that's pretty incredible when you think about that

00:34:32   and when you, if they can keep doing that.

00:34:35   You know, there's already, there's big businesses

00:34:38   that are built on top of Amazon.

00:34:39   I don't know if Instagram is still using Amazon

00:34:42   for their picture hosting, they were.

00:34:45   And I don't know if they've moved over

00:34:46   to Facebook's infrastructure since,

00:34:48   but it's no guarantee that they have,

00:34:50   and they may still be using Amazon

00:34:52   to host all of their images.

00:34:53   - Remember when they first announced iCloud,

00:34:57   and people sort of poked around,

00:35:00   and it ended up, it was like a weird hodgepodge

00:35:03   on the back end where Apple had built some of it,

00:35:06   and it was in the Apple data centers.

00:35:07   But they were also using Windows Cloud.

00:35:13   I know they were using Microsoft for some of it.

00:35:16   Were they using Amazon too?

00:35:19   I think they may have been.

00:35:20   I think they were.

00:35:21   I think even Apple was using Amazon.

00:35:23   And nobody's more secretive than Apple about stuff like that.

00:35:28   But that's pretty telling.

00:35:30   Yeah.

00:35:31   And that brings up something that some people have said in response to this.

00:35:37   Apple and Amazon argument, it's like, so obviously we had the, the dev center was down all that

00:35:42   time, right?

00:35:43   Right.

00:35:44   It was supposedly hacked or whatever.

00:35:45   But they also, they've had, it was down again yesterday briefly and, and they've of course

00:35:49   had a lot of issues with, with various different things, iMessage and, and all kinds of services

00:35:54   and iCloud just being down.

00:35:56   So why doesn't Apple take a page from Amazon's book and just spend a sliver of their $150

00:36:03   billion dollars or whatever it is in cash and just go crazy on building out the infrastructure.

00:36:09   And so I think the argument there is that you have to assume that they're doing that,

00:36:15   right?

00:36:16   I mean, I don't know, what are your thoughts on that?

00:36:18   People get so frustrated about this and assume that Apple is so obsessive about holding on

00:36:24   to their cash that they don't want to spend it, even when there's a very obvious thing

00:36:27   that they should spend it on.

00:36:28   I have to assume that they're not doing that, that we don't know the whole picture, like

00:36:32   Maybe they just don't, maybe they can't build it fast enough.

00:36:35   Maybe they're spending as many billions as they can to do it, but they just can't do

00:36:37   it at quite the pace that they want and need to yet.

00:36:41   Yeah, that's a good question.

00:36:45   But with like data centers, they can't keep them secret because they're, I mean, I don't

00:36:50   think that they can.

00:36:51   I mean, I guess it would depend where you built it.

00:36:53   But you know, like the big one in North Carolina, I mean, it's not a secret.

00:36:56   I mean, everybody knows where it is.

00:36:58   And because they're so big, like to build a data center that is significant to Apple's

00:37:06   needs that just would have some sort of significant impact on the services they provide is a huge

00:37:13   undertaking and therefore it requires deals.

00:37:19   You know the whole reason they went to North Carolina is they got deals from the government

00:37:22   on...

00:37:23   Mad Fientist Right, tax breaks.

00:37:24   and whatever, zoning permits I guess and stuff like that.

00:37:28   That it's not secret because all that stuff,

00:37:33   you know, when you're negotiating with the government

00:37:34   is all, you know, has to be out in the open.

00:37:37   So, you know, to my knowledge, there's not a lot of

00:37:41   brick and mortar building out of data centers

00:37:46   that Apple's undergoing.

00:37:48   So I don't know.

00:37:49   I mean, how else could they-- - Which, if it's true--

00:37:50   - What else could they spend money on?

00:37:52   Well so you know I mean certainly they have to be spending money on sort of the infrastructure

00:37:58   for components right I mean you know there's all this talk that they've that while they

00:38:02   work with third parties overseas that they've built a lot of factories for them and sort

00:38:06   of built the infrastructure needed to do a lot of what they're doing which is customized

00:38:13   and so they're certainly spending money on that but it is crazy if they're not spending

00:38:18   as much as they possibly can on the data warehouses,

00:38:23   because everyone knows that this is such a problem for them,

00:38:27   and we see it on an almost daily basis now.

00:38:30   And so, what are they holding onto that money for?

00:38:33   And that sort of goes back to, again,

00:38:36   the argument between Amazon and Apple

00:38:38   and sort of the Wall Street component of it.

00:38:40   Of course, Apple started going under fire

00:38:42   when they surpassed $100 billion in cash.

00:38:46   Of course, a lot of that was overseas, as we know.

00:38:48   But there were activist shareholders

00:38:51   who were rising up and saying,

00:38:52   "You need to distribute this money."

00:38:53   And they are, of course, now.

00:38:55   But Amazon doesn't have that problem again

00:38:58   because they just aren't posting these giant amount of profit

00:39:02   and holding on to all this cash.

00:39:03   I think they do it plenty, they have several billions,

00:39:05   I don't know what the number is,

00:39:06   that they actually hold in cash.

00:39:07   But it's nowhere near what Apple is holding.

00:39:09   And so why exactly is Apple holding onto this?

00:39:13   They say it's for future considerations

00:39:15   or for defensive purposes,

00:39:17   but they're really not doing anything for it.

00:39:20   So was it, you start to wonder,

00:39:22   at least I'm starting to wonder,

00:39:23   was it a miscalculation to actually

00:39:26   build up this amount of cash?

00:39:27   - Right, start amassing these hordes of money.

00:39:30   I also feel like they,

00:39:31   I'm not, I don't know, I don't work for the SEC,

00:39:36   so I might be off base here,

00:39:37   but the money that they have, quote unquote, in the bank,

00:39:41   the profits from the past 10 years that they're sitting on,

00:39:44   if they'd spent a huge chunk of it in the next two quarters

00:39:49   to build out another massive data center,

00:39:54   I don't know, let's say in Texas or Alaska, I don't know,

00:39:57   it doesn't matter where,

00:39:58   they'd still have to account for that in those quarters.

00:40:01   So it's not just because they have the money in the bank

00:40:05   doesn't mean that it wouldn't have an impact

00:40:07   on their quarterly earnings.

00:40:11   And it would just look bad investor-wise

00:40:15   if their profit for like two quarters from now

00:40:20   was way lower than it would have been

00:40:22   if they hadn't made this massive upfront infrastructure.

00:40:27   - Capital expenditure.

00:40:28   - Now they can say it.

00:40:28   They can explain it and people who are paying attention

00:40:31   could listen to them and say,

00:40:32   "Look, we're doing this for this reason

00:40:35   "and it's in our best interest going forward."

00:40:38   But we all know that people don't really listen

00:40:40   to the explanations.

00:40:42   They just see, oh, Apple turned lower profit

00:40:45   than they were expected to, they must be going under.

00:40:49   - And again, that just goes back to my thought

00:40:52   on why Bezos is a genius with this.

00:40:54   I won't call it manipulation,

00:40:57   but it's the way that he's playing it, right?

00:41:00   Where he doesn't have to worry about spending

00:41:03   a billion dollars one quarter on a data center

00:41:06   because the investors just aren't used

00:41:09   to seeing that billion anyway.

00:41:10   and they think they'll see that billion down the road

00:41:12   somewhere as a result, and they think they'll see 2X

00:41:15   that billion down the road as a result of him

00:41:17   sending this billion right now.

00:41:18   - Right, maybe I'm oversimplifying,

00:41:21   but it's the way he's set them up

00:41:24   from an investor perspective

00:41:26   that really does contrast with Apple,

00:41:28   where Apple's never really ever,

00:41:31   even in the old days when they were relatively

00:41:33   a small company, has never been held

00:41:37   in high regard by Wall Street.

00:41:40   You know, the stock, I think, has long been, was, you know, in the old days, long undervalued

00:41:46   because they were a misunderstood company and the company was never really set up to

00:41:52   make investors happier.

00:41:53   You know, it was always about the product.

00:41:56   It was always – the company has always been set up to make great products, great experiences,

00:42:02   and everything else is secondary.

00:42:03   Whereas I think Bezos' experience, it's like what's becoming clear to me is that

00:42:11   he set the company up in a way that it's always been set up to make investors happy

00:42:16   or satisfied.

00:42:20   It's not a coincidence.

00:42:21   It's not like a, like the way Matt Iglesias puts it, it's almost like investors are

00:42:26   delusional to support.

00:42:29   It's crazy that they support Amazon's lack of profitability

00:42:33   quarter after quarter, whereas I think the truth is

00:42:36   that was by design.

00:42:39   - Yeah, and again, I go back to the earlier point

00:42:43   where Bezos is obviously aware of this

00:42:46   because he's put it in the shareholder letters

00:42:48   where it's like, at some point we recognize

00:42:51   that we need to turn a profit eventually,

00:42:54   and we're gonna do that down the road.

00:42:56   We may have to check in from time to time

00:42:58   to make sure that we can do that,

00:42:59   and maybe that means just not spending billions of dollars

00:43:02   on infrastructure costs, you know,

00:43:04   one quarter or something like that,

00:43:05   and then all of a sudden they show like a, you know,

00:43:07   like a $500 million to a billion dollar profit

00:43:10   all of a sudden, and then the very next quarter

00:43:12   they go right back to building out again,

00:43:13   and so maybe they do do that sometime in the next, say,

00:43:16   year, couple years or something like that.

00:43:18   I don't know, they're not showing any signs

00:43:20   that they're gonna do that, but yeah,

00:43:23   I think you're right that Bezos is just playing this

00:43:27   sort of playing this perfectly,

00:43:30   that everything is in the future

00:43:33   and everything is going to be rosy at some point.

00:43:37   But what really is the point,

00:43:38   and to go back to the idea of what Apple is doing

00:43:41   with their money, what is the point

00:43:43   of carrying all these profits if, you know,

00:43:45   when you get beyond a certain point,

00:43:46   I mean, Apple couldn't buy enough companies,

00:43:49   nor would they want to because it would be a disaster

00:43:50   if they spent $100 billion buying companies.

00:43:52   So they're not gonna do that.

00:43:54   They're probably investing in infrastructure

00:43:58   as much as they feel comfortable with.

00:44:00   So they clearly have more money than they need for that.

00:44:03   And so what is the point at the end of the day

00:44:05   of having all these massive profits

00:44:07   beyond kind of having a major headache?

00:44:10   I mean, it's good if the economy turns.

00:44:12   That's one argument, right?

00:44:13   Like if the economy goes bad again,

00:44:16   Apple doesn't necessarily have to change

00:44:19   anything they're doing because they have so much money

00:44:22   and they could sort of dip into that.

00:44:24   But Amazon seemed to weather the last downturn perfectly fine.

00:44:29   I don't know what their numbers exactly were then,

00:44:32   but certainly they've been growing.

00:44:35   Yeah, right.

00:44:36   - And I think that's another thing that to me,

00:44:40   at least threw me off about Amazon,

00:44:42   is that my first impression of Amazon

00:44:44   was formed in the GoGo dot com 90s.

00:44:49   - Right.

00:44:50   - And I mean, I was an early Amazon user,

00:44:52   I mean, I remember when Amazon was just a bookstore and they had crazy customer service.

00:44:58   And it was free shipping for everybody and crazy low prices on the books.

00:45:03   And they had just amazing customer service.

00:45:05   Like if you wanted to send a book back, they would just pay for the shipping to send it

00:45:09   back.

00:45:10   You would just like fill out a form on the website and they'd be like, "Here, print

00:45:12   this out and the UPS guy will pick the book up tomorrow," or whatever it is you bought

00:45:17   once they started selling more stuff.

00:45:21   But the bottom line, though, is that they ran that run-up in the mid to end of the '90s.

00:45:27   They were running at a real loss.

00:45:29   They were losing money quarter after quarter after quarter in a typical dot-com mindset.

00:45:36   Lots and lots of dot-coms had that same idea.

00:45:38   You know, we'll just lose money to build market share and blah, blah, blah, something.

00:45:42   Well, blah, blah, blah, something happened for Amazon, though, where they did kind of

00:45:47   turn it around.

00:45:48   And so yeah, they don't make big profits any quarter,

00:45:52   and sometimes they lose a little,

00:45:53   sometimes they make a little.

00:45:55   But it's not at all that,

00:45:58   it's not at all like it was in the 90s

00:46:03   when they were burning money.

00:46:04   They're not burning money.

00:46:06   - Right, and even, I brought this up briefly in the piece,

00:46:10   but it's funny that they,

00:46:12   Amazon invested in things like Pets.com,

00:46:14   which of course was one of the great .com flame outs,

00:46:18   And even more recently, they invested in LivingSocial,

00:46:20   which they've had to write down that investment.

00:46:23   And so they're still taking some risks

00:46:26   and making sort of crazy bets, but in the '90s,

00:46:28   the Pets.com thing was a total disaster

00:46:30   while they were losing money,

00:46:32   and they still didn't go under.

00:46:33   Now we have, the LivingSocial thing is a total disaster,

00:46:36   but they're able to easily withstand something like that.

00:46:40   It doesn't even really make a ding.

00:46:42   They did lose, whenever that was, a few quarters ago

00:46:45   that they wrote it down, they posted some losses.

00:46:47   but investors still don't mind.

00:46:50   It's like they trust Amazon because Amazon has lived through

00:46:54   kind of some seemingly impossible things to live through

00:46:58   like you were saying in the dot com bubble.

00:47:01   - And like you said, Bezos has been up front about it

00:47:04   forever, I mean, he has been,

00:47:07   Amazon investors are getting exactly what they were promised.

00:47:11   - Yeah.

00:47:12   - But maybe someday they're gonna need to turn a profit.

00:47:15   - I mean, you have to assume that they will.

00:47:16   It becomes like, it just becomes a very weird thing.

00:47:20   And I would have thought, I think I,

00:47:21   I wrote this like two years ago, I think.

00:47:25   At some point they will have to show profit, right?

00:47:27   Like when, or is this, I don't get it, this is madness.

00:47:30   When are they ever going to actually show a profit again,

00:47:34   or a meaningful profit again?

00:47:35   And you know, investors just,

00:47:37   the stock is past 300 now or whatever,

00:47:39   and they show no signs of slowing down.

00:47:42   So I don't know actually when that is

00:47:45   that they have to do that.

00:47:45   And Bezos seems like he's a step ahead

00:47:48   and that he does know when they'll have to do that.

00:47:51   And I don't know when that is,

00:47:52   and maybe it's never, but I think that it will be

00:47:55   sometime relatively soon, I have to believe that.

00:47:59   - Yeah, I think so.

00:48:00   Let me take a break here and thank our second sponsor.

00:48:02   Our second sponsor, back from last week, is Ting.

00:48:05   T-I-N-G.

00:48:07   And what's Ting?

00:48:08   Ting is a no BS mobile service.

00:48:12   no contracts, no overage penalties, they have a bunch of great plans, you pick the one that

00:48:20   fits the right size for you. If you go over, they just move you up to the next tier and

00:48:24   you pay that for the month. If you are under, if you don't use as much voice or data or

00:48:30   whatever you've signed up for, they'll move you down to that tier so that you save money.

00:48:39   They have an online calculator. You go to their website at talkshow.ting.com. That way

00:48:47   they'll know you came here from the show. They have an online calculator and it's amazing.

00:48:53   You pump in what you're paying now for Verizon or AT&T or whatever it is. Sign up. You tell

00:49:00   them how much data you use, how much voice you use and they'll tell you how much you'll

00:49:04   save per month. And if you're using something like AT&T or Verizon, I think it's almost

00:49:10   guaranteed you're going to save money. It's kind of amazing when you see it.

00:49:15   There is a catch. The catch is they don't have the iPhone right now. That's obviously

00:49:19   going to affect a significant number of people who listen to this show. But there's also

00:49:23   a lot of people like John Siracusa out there who don't have an iPhone, don't want to spend

00:49:27   money on a $120 a month iPhone plan. And if that's you, I seriously suggest looking at

00:49:34   Ting. They're an MVNO that's built on the Sprint network, so it's got great coverage

00:49:39   all over the country. A whole bunch of great features, great support from the same parent

00:49:44   company that does Hover, the great, great domain registrar. And like I said last week,

00:49:52   registration is notoriously a scummy business. Hover has a great reputation. No scams, no

00:49:58   tricks. Mobile service is exact same way. Mobile service is notorious for all sorts

00:50:03   of hidden charges and overage fees and wow, I signed up for $100 a month plan and my bill

00:50:08   is $150. How'd that happen? Ting is the complete opposite. Totally have your back. Great support.

00:50:16   unbelievable prices.

00:50:18   So again, check them out at talkshow.ting.com.

00:50:22   I think you'll be surprised at how much money you can save.

00:50:25   And you can also, you can sign up to be notified

00:50:30   when they do support the iPhone, which they're working on.

00:50:33   So Horace Dejue and his piece following up on Amazon,

00:50:41   I think he focused a lot on the idea of flipping the switch.

00:50:45   - Right.

00:50:46   sort of switching from break even to suddenly making big profits. I think if

00:50:51   there's anything, and I liked his piece, I thought he made a lot of great pieces, I

00:50:54   linked it up, but I think maybe flipping the switch is the wrong notion. I think

00:50:58   it's maybe a little bit more like turning this spigot up a little bit, you

00:51:03   know, and then yes or the opposite turning the spigot down on the

00:51:07   expenditures that they have, right? Right, it's not flipping a switch and

00:51:12   And suddenly, piles of profits start piling in.

00:51:15   I think it's turning dials a little down, turn this a little down, turn this a little

00:51:20   up, maybe raise prices just a little, maybe decrease expenditures on capital and ventures

00:51:30   – expenditures a little bit.

00:51:32   And all of a sudden, the little bit of profits turn into a little bit more profits, suddenly

00:51:38   turn into more profits, turn into more profits quarter after quarter.

00:51:41   And it's, you know, like water boiling on the stove.

00:51:46   It doesn't just go from cold to hot.

00:51:50   But eventually it is very hot.

00:51:52   - Yeah, I think, I guess that was one of my main problems

00:51:57   with Horace's post was just that it seems like to me

00:52:01   that he was trying to squeeze Amazon into

00:52:05   a easy to understand Apple business model, right?

00:52:09   where at some point Amazon will have to flip a switch,

00:52:14   meaning turn up the cost, I assume,

00:52:19   of the goods that they sell to make better margins

00:52:23   and then to make better profits.

00:52:25   What I think he's discounting is the fact that they can

00:52:29   instead just not spend as much money on dated warehouses

00:52:32   or things of that nature,

00:52:34   and the fact that Amazon is in,

00:52:36   they're in an increasing number of businesses.

00:52:38   Remember, we talked about AWS.

00:52:41   They're now getting into this sort of,

00:52:43   the Fresh Direct stuff, right,

00:52:46   where they're doing sort of grocery deliveries.

00:52:48   And I don't know what the margins are on that.

00:52:50   They're probably not very great.

00:52:51   But still, that's another new business

00:52:53   that they're getting into.

00:52:54   And we haven't even talked about things

00:52:56   like where they could potentially,

00:52:59   they could get into the advertising business more certainly.

00:53:02   They have a lot of interesting user data,

00:53:05   and they have all those credit cards on file.

00:53:07   so they could get more into the in-app purchase stuff.

00:53:10   Certainly they already have their own app store.

00:53:12   They're just doing a lot of stuff

00:53:13   that I think is totally discounted

00:53:16   in the notion that Amazon is still just the one company

00:53:19   that sort of, you go to buy anything online.

00:53:21   They're doing so many different things now.

00:53:23   So I don't think that it's just a matter

00:53:25   of flipping a switch.

00:53:26   I think you're right.

00:53:26   It's turning, it's just tweaking nozzles

00:53:28   for all of these different businesses that they have

00:53:30   that is the way that if they do eventually decide

00:53:34   that they want to show profits again,

00:53:37   at least for a little bit, that's how they're going to do it.

00:53:40   - Yeah, I totally agree with that.

00:53:42   Backtrack a little bit, and like you said,

00:53:46   you were talking about almost the perfect storm

00:53:50   that the iPhone was for Apple.

00:53:53   Maybe one of the reasons they've amassed so much cash

00:53:57   is that they just, it's almost a surprise to them

00:54:01   that the iPhone turned into such a success.

00:54:05   - Oh, yeah.

00:54:05   it three years later that all of that technology, software and hardware that the iPhone was,

00:54:15   gave them the perfect opportunity to do the iPad and start suddenly, after all these years,

00:54:22   taking a massive chunk of the PC industry.

00:54:28   Because let's face it, as the years have gone by, this is what has happened, is that the

00:54:32   the iPad and tablets in general have overrun, just completely almost overrun, the sub-thousand

00:54:42   dollar portable computer market?

00:54:44   Yes. I think that the first point is definitely right, where I would imagine that they were

00:54:52   surprised at how good the business could be. Because they were entering a new space, Jobs

00:54:59   famously said, what percentage did he want it to get? Like 5% or whatever it was of the

00:55:05   smartphone market. And 1% of the phone market. 1% of the overall phone market, right? And by the way,

00:55:13   while Nokia and some other ones had great businesses at that point, they were nowhere

00:55:17   near the business that the iPhone is from the carrier, at least in the US carrier market where

00:55:25   where these things are subsidized

00:55:26   and the money gets paid up front to Apple.

00:55:27   And so it's almost like they were,

00:55:30   it really was the perfect storm

00:55:31   because right as Tim Cook was taking over,

00:55:35   Tim Cook had streamlined the art

00:55:37   of making beautiful products that people want

00:55:41   for a relatively inexpensive manufacturing fee.

00:55:46   The thing is, we talked about Apple making premium products

00:55:52   And so most of the time when you make a premium product,

00:55:55   you know, the problem at a very high level,

00:55:58   I know this isn't the way that it always is,

00:56:00   but the thing is it costs more

00:56:02   because it costs more to make, right?

00:56:04   But Apple got so streamlined at getting good

00:56:07   at making things like the iPhone,

00:56:08   where it's like they could make this thing

00:56:12   that's so much higher quality than everything else,

00:56:14   but they could almost make it at the same cost

00:56:15   of their rivals making these decidedly less quality phones.

00:56:19   And so that, along with the fact

00:56:22   that the smartphone market, Apple timed it perfectly,

00:56:25   that it took off, and with the carrier subsidy model

00:56:28   already in place, and I think the carrier

00:56:32   sort of underestimated how big something like the iPhone

00:56:36   and now the Android phones would become,

00:56:39   it really was the perfect storm in making this

00:56:41   the absolute perfect product that I don't think

00:56:44   that anyone can really match again,

00:56:47   at least anytime soon, in terms of just how much profit

00:56:51   are making off of that thing.

00:56:52   - Right.

00:56:53   - I mean think about what Apple's margins used to be,

00:56:55   and then remember like a few quarters ago

00:56:58   when they got up to, it was like 42% or something like that?

00:57:01   I mean those are like software margins

00:57:03   for a hardware company, which is crazy.

00:57:05   - Right, they significantly were higher

00:57:07   than Microsoft's and Google's, which is crazy,

00:57:10   because Microsoft and Google are primarily

00:57:13   overwhelmingly software companies.

00:57:15   - Right, right.

00:57:17   - Yeah, and so I think you're right there with me,

00:57:20   I really have almost zero doubt.

00:57:22   I mean, you know, nothing certain.

00:57:24   But I have almost zero doubt that innovation

00:57:27   is far from over at Apple.

00:57:28   I think Apple should be good for the decades

00:57:31   to come in terms of coming up with new products

00:57:34   in new categories.

00:57:36   I don't know, though, that they'll ever come up

00:57:38   with a new product in a new category that's

00:57:40   of the massive profitability as the iPhone and the iPad.

00:57:46   Because--

00:57:46   Yeah.

00:57:47   Yeah.

00:57:48   You know, just think about the size of the market.

00:57:50   It's almost everybody on the planet is going to have a mobile phone.

00:57:56   And certainly, you know, there's a huge, huge chunk of the world that can't, you know, even

00:58:03   dream of buying a $700 phone.

00:58:07   But it doesn't matter to Apple, you know, if we're just talking about profitability

00:58:10   and revenue.

00:58:11   You know, I'm not saying those people don't matter, but their money doesn't matter because

00:58:15   if they don't have the money, it's irrelevant, you know.

00:58:18   in terms of the people who could in theory buy a $700 cell phone, it's almost everybody

00:58:29   who has that amount of money is going to at least consider a cell phone. It's a massive

00:58:33   market. It's a very expensive product. I think in the grand scheme of things, a $700 phone

00:58:40   or $600, $700, $800 tablet, these are expensive things in the grand scheme of things. I mean,

00:58:46   and contrast with the iPod, which really didn't take off until it hit the $199 mark or so.

00:58:54   And even then, that's expensive for a music player.

00:58:58   Right. And the flip side of what you're saying, which is exactly right, is that the iPhone

00:59:04   didn't take off in a meaningful way either until it got down to $199 because it was subsidized.

00:59:11   And there's no other, there's just no other business that's like that, right? There's

00:59:14   there's not gonna be some weird entity that's not Apple

00:59:18   that's going to pay Apple to lower the price

00:59:21   of their products.

00:59:22   - Right, and in terms of Apple not,

00:59:23   maybe not knowing quite what they were getting into

00:59:26   at the outset, I think the thing that they knew

00:59:29   that they had was they had an amazing device, right?

00:59:32   I mean, there's, and everybody knew, you know,

00:59:34   it was the one product that Apple introduced

00:59:36   that wasn't panned on day one as, you know, for whatever.

00:59:39   I mean, there were some people who thought

00:59:40   they were gonna be a failure for some reason or another,

00:59:43   but nobody denied that the thing wasn't incredibly cool.

00:59:47   - Right.

00:59:48   - They knew that they had a great product.

00:59:50   It was an amazing thing.

00:59:52   It's holy shit, you have a computer in your hand,

00:59:54   and it's all touch, and it was so smooth,

00:59:56   and everybody knew that was great.

00:59:58   So they were focused on that, and they knew it.

00:59:59   They had a great thing.

01:00:01   But just think about the way

01:00:02   that with the original iPhone in 2007,

01:00:05   they actually tried to circumvent

01:00:06   the traditional carrier subsidy thing,

01:00:10   where you bought your, to buy your iPhone

01:00:13   on June 28th or whatever it was, 2007,

01:00:19   you paid, we all paid 599 or 499.

01:00:23   - I remember that, yeah, it was crazy.

01:00:26   - We bought unsubsidized iPhones.

01:00:29   And I forget what we got in turn for that.

01:00:33   I guess our monthly fee from AT&T was a little bit lower

01:00:37   'cause we didn't have any kind of contract thing.

01:00:39   We still had contracts with AT&T,

01:00:41   but we weren't buying subsidized devices.

01:00:45   And I can't help but think it was because they wanted,

01:00:47   they somehow thought they don't want to get into that

01:00:51   because then it would tie them to the carriers too much.

01:00:56   - Yep, that's exactly right.

01:00:58   And then they, what I think was their real genius

01:01:02   was the fact that they stayed exclusive to AT&T for so long

01:01:06   and they forced the other carriers to sort of bend

01:01:09   to their will, being Verizon especially,

01:01:13   because otherwise they would have had to make

01:01:16   so many sacrifices.

01:01:17   We would have had Verizon on the back of the phone,

01:01:20   we would have had little stickers,

01:01:21   we would have had all these apps installed

01:01:23   like we see on Android.

01:01:24   Because you remember that Google tried to do the same thing

01:01:28   with the, I think it was the Nexus One, the original one,

01:01:31   where they tried to sell it online at full price

01:01:36   without carrying, you could pick your carrier, right?

01:01:38   - Right.

01:01:38   - And it just did not work, same idea.

01:01:40   It didn't work for the same reason

01:01:41   because no one's gonna pay that much for a phone.

01:01:43   The problem was exacerbated by the fact that,

01:01:46   unlike Apple, Google doesn't have retail stores.

01:01:49   So like Apple's secret success really could,

01:01:52   you could also say why they could pressure the carriers

01:01:55   as much as they have those stores which move the iPhone.

01:01:58   So they don't need really AT&T and Verizon.

01:02:00   They do at a certain scale, of course,

01:02:02   because more people buy them

01:02:05   based on what carrier they want.

01:02:07   But they have their backup plan,

01:02:09   which is just that we'll try to push them in the stores.

01:02:11   And you hear that even now.

01:02:12   They're trying to amp up the amount

01:02:14   that are sold through the stores

01:02:15   versus through the other carrier partners.

01:02:18   - Yeah.

01:02:19   And it just, I think, I forget how many iPhones

01:02:25   they sold in the first year,

01:02:26   but it was only like, it was like a million

01:02:27   or something like that?

01:02:28   - Yeah, I mean, it was, yeah, if even that.

01:02:30   It was something small, significantly small.

01:02:32   - I mean, it's, you know, they sell like five million

01:02:35   in the opening weekend now when they come out with a new one.

01:02:37   It's like they subbed it.

01:02:39   That was like the whole year.

01:02:40   So like in the grand scheme of things, that first iPhone was not a hit product in the

01:02:45   mass market.

01:02:46   It was among people like us, probably listeners of the show, probably a huge number of people

01:02:51   who listen to this show probably bought an original iPhone.

01:02:54   But it wasn't a mass market hit because it was a $699, $599 phone.

01:03:00   Even though when you buy a subsidized phone for $1.99 or $99, you are paying the price

01:03:07   eventually.

01:03:08   And you're paying more.

01:03:09   Right.

01:03:10   Right.

01:03:11   But it's a—

01:03:12   You actually do pay more.

01:03:13   Right.

01:03:14   But the psychology—the truth is the psychology works.

01:03:15   Yep.

01:03:16   It does.

01:03:17   And people—it feels like you're only buying a $199 iPhone because you're already prepared

01:03:24   for that monthly bill that has the subsidy charged built in.

01:03:30   Baked into it.

01:03:31   Yeah, that's exactly right.

01:03:32   And so now with all this talk of this cheaper iPhone, which I don't know anything firsthand

01:03:36   about or secondhand, I do think that we're finally at the point where this is legitimate

01:03:44   and there will be some sort of cheaper version of the iPhone because of everything we just

01:03:49   talked about.

01:03:51   But also the fact that Apple wants to expand the market.

01:03:55   They need to have a bigger share of the Chinese and Indian and some other different countries

01:04:01   where they don't have the subsidy model.

01:04:03   And so that's the only way to do it.

01:04:05   And we'll see what the price point ends up being of that thing.

01:04:09   What are the things floated around now that it would be like $300 or something like that

01:04:12   unsubsidized?

01:04:13   Which still might be too much money.

01:04:15   I don't know.

01:04:16   Yeah.

01:04:17   Cheap might be the wrong way to look at it.

01:04:19   But I think pricing-wise what it's going to turn out being is the thing that we've all

01:04:24   been talking about since the fall of 2007 when the first iPod touch came out, which

01:04:30   is if the iPod touch only costs $350 or $300 or whatever, how much would it cost for them

01:04:38   to put a cell chip in there? I mean, of course it would make it thicker. Let's just assume

01:04:44   that putting the extra antenna and chips, et cetera, in to make it do LTE and voice,

01:04:51   you know. But it can't be that big, you know.

01:04:53   I mean that yeah, I touch has always been thinner than the iPhone

01:04:56   But why couldn't they make an iPod touch if it's 300 350 bucks?

01:05:00   Why can't they make a cell phone for that cost and I think that's what this you know lower cost iPhone is

01:05:06   It's an iPod touch that can make phone calls

01:05:08   Yeah, and so I wonder what they'll do then in the US market where you know, the the carriers just dominate

01:05:14   Certainly they got the carriers to agree to do

01:05:18   the the a la carte iPad

01:05:20   Stuff originally right like where you could just you could pay one month and not pay the next month

01:05:24   And it was really easy to flip on and off right there was no contract

01:05:27   I don't know how that will go over with this with this new device like will

01:05:33   Will it just not be available in the u.s.. That sounds insane it has to be right like there's no way that

01:05:37   They would do it and only launch it overseas no

01:05:39   All right, let's come back to that

01:05:41   I have some thoughts on that

01:05:42   But let me just do the final sponsor and then we'll come back to that we would be a great way to finish this show

01:05:47   I want to tell you about BatchGeo.

01:05:50   B-A-T-C-H-G-E-O. They've sponsored the show before.

01:05:57   Or maybe they sponsored during Fireball.

01:05:58   Sometimes I confuse them.

01:05:59   But I know they've come back, and they're great.

01:06:01   It's amazing.

01:06:02   It's a fast, easy way to visualize location data.

01:06:06   So one thing you can do if you have a bunch of addresses

01:06:09   in an Excel spreadsheet, just copy them and paste them

01:06:12   in to BatchGeo website and hit a button,

01:06:15   and boom, you have a map with all of those addresses on it.

01:06:18   And I tried it.

01:06:19   It sounds too-- that to me sounds like way too good

01:06:22   to be true.

01:06:23   I figured I'd have to spend some time putting the data

01:06:25   in a certain way or whatever.

01:06:27   Nope, you just put addresses in, hit a button,

01:06:30   and you get a map with the addresses.

01:06:32   They have all sorts of other things you can do too.

01:06:34   They have an easy way that you can make a locator

01:06:36   app for your website.

01:06:38   Like if you have a website with locations,

01:06:42   like a restaurant or something like that,

01:06:44   They have an easy way to do that thing where you can find a location near you.

01:06:48   Just go to their website. They have a fun and very simple video that explains the whole product.

01:06:54   Way better than I could do here.

01:06:56   So if you have any kind of location data, want to make maps of any kind, go to batchgeo.com

01:07:03   and check out their video and it will explain the whole thing. It really is amazing.

01:07:06   It's a fascinating, fascinating thing. I can't believe how easy it is to make maps with this thing.

01:07:11   So here's my thought on the low-cost iPhone. My thought is why now? Like because they have had a

01:07:19   low-cost, they did the coverage of it has to me for years been misguided because they've had a

01:07:26   lower-cost iPhone for years and years ever since they started the strategy of selling the previous

01:07:33   year's phone for another year at a lower price and then they went to three levels where they had the

01:07:39   two-year-old phone which is now free with a contract and then a year-old phone

01:07:43   for 99 bucks yep and it gets lost in the tech press because the tech press

01:07:48   doesn't care about anything other than new products right it's it's not new

01:07:52   that's exactly right doesn't count and somehow that spread to the business

01:07:57   version - you know like the the business journalists also somehow discount the

01:08:04   the fact that Apple has a pretty darn good free with contract phone right now, the iPhone

01:08:11   4.

01:08:12   But again, the key is with contract, that it's free.

01:08:15   How much are they selling it for?

01:08:17   I don't know.

01:08:18   How much are they selling it for unsubsidized right now?

01:08:19   I honestly don't know because they don't sell them in the US.

01:08:22   I think though, I think it's still...

01:08:25   So basically, they're taking a $200 thing down to $99 and then down to free, right?

01:08:31   So I think what I think not sure about this 100% but I think that they're selling it for

01:08:35   about 450 or whatever you know it's basically full price of the the iPhone 5 minus $200

01:08:41   for that thing so I think it's still 450 and I do think that that's still a non-starter

01:08:46   in some of the other countries around the world and so I don't know what the price point

01:08:53   they need to get to is I don't know if it's if it's $300 I don't know if that's that's

01:08:58   what they're aiming for. It may be $200 on Subsidize that they need to get to to actually

01:09:03   make it a viable thing. And I don't know what kind of corners they'd have to cut to do that.

01:09:08   But like you're talking about, how much is the cheapest iPod Touch right now? Is it $250?

01:09:15   Is that what it is?

01:09:16   Or is it in between? Let's take a look. $229.

01:09:20   $229.

01:09:22   And that's the 16 gig one that doesn't even have a...

01:09:26   Oh, with a camera.

01:09:27   Right.

01:09:28   camera. Yeah, so okay, so they like basically shaved $20 off or whatever by

01:09:33   removing that camera. The one with the camera are $299. Okay, so and does that

01:09:38   have more storage or is that the same? Yeah, $32 and $64. Okay, so conceivably they

01:09:45   could do a 16 gig sort of iPod touch with cellular radio right for, I don't

01:09:53   know, I don't know how much it would cost. I almost think though... $250? Yeah, maybe, I

01:09:57   I don't know. It seems like $2.99 is definitely reachable.

01:10:00   Yeah, for sure.

01:10:01   I would, I can't help but think that the plastic back that all reports about this device,

01:10:09   you know, claim and which makes sense if it's the point to make it cheaper, you know,

01:10:13   has got to be cheaper than the aluminum. I don't know if the aluminum is that significant a factor

01:10:18   in the $300 cost, but, you know, I mean, a couple cents here, a couple cents there, and, you know,

01:10:24   All of a sudden, you might have a $250 iPhone.

01:10:29   And so I think that's a good guess.

01:10:31   I think that's like, it probably will be $299, or they'll try that at least at first, and

01:10:36   maybe they have to lower it to $250, and they can still do that within their margins.

01:10:41   Or have a $250 one to get you in the door, but everybody's going to buy the $299 one

01:10:46   because there's something.

01:10:48   More storage.

01:10:49   Right.

01:10:50   Right.

01:10:51   Yeah, but by I mean and you know, I don't know

01:10:54   I don't remember what the what the margin on the iPod touches, but it's clearly not what the iPhone is

01:10:59   And that's that's gonna be a huge problem for Wall Street again

01:11:03   You know where the margin like we were talking about a few quarters ago is at 40 something percent and now all of a sudden

01:11:09   it's probably gonna go below, you know, maybe goes below 30 percent because

01:11:12   Maybe if they if they do this in a successful way at any kind of meaningful volume

01:11:18   This is just going to drive down the margin and that's what that's unfortunately one of the things that Wall Street will focus on

01:11:25   And you know say like well, you know the the time of riding high for Apple is is over now

01:11:32   They're now they're going into you know, a low margin volume business

01:11:37   Yeah

01:11:37   I have some serious questions about how they're gonna bring this one to market too because I don't know I'm sure they'll I'm almost

01:11:45   Like you I can't believe they wouldn't sell it in the US but in the US. I don't know how they sell it

01:11:50   Unsubsidized I think oh right, so I think they would I think I think this is all

01:11:56   Coming together. There's a lot of pieces out there right and we're and we're starting to see them

01:12:01   Starting to make sense. Why is Apple pushing for?

01:12:05   Apple stores to sell more iPhones within the store. Why do they care certainly?

01:12:10   You know they're in more control the experience you could argue

01:12:13   and

01:12:14   It's just a better overall experience for the customer

01:12:17   And you know they like having that relationship and not having to worry about using the carrier certainly

01:12:22   That's all true, but what if it's also that they're they're only going to sell this through the Apple stores and

01:12:26   They want to get people in the mindset that if you want to buy an iPhone you go to an Apple store

01:12:33   You don't go to Verizon anymore or AT&T because and now by the way we have this lower cost new iPhone

01:12:40   that comes in a variety of colors and

01:12:43   And it's only available exclusively at the Apple Store. So come on in and get it. And

01:12:48   so maybe they're trying to lead into that a little bit with this.

01:12:51   Maybe. That's interesting. I hadn't thought of that. But that definitely makes some sense

01:12:56   with the, again, I mean, this I guess we know because people who work at Apple Stores have

01:13:02   even said so. That it's come down from Cupertino that the retail Apple Stores are supposed

01:13:10   to be trying to sell more phones.

01:13:12   Right.

01:13:13   than they had been.

01:13:14   Here's the other factor that I've been thinking about.

01:13:16   I gotta write this up for Daring Fireball,

01:13:18   but long story short, why this year

01:13:22   to switch to a new phone at the low price point

01:13:26   as opposed to previous years,

01:13:28   you know, when they've sold these years old phones.

01:13:31   And there's a couple of technical reasons

01:13:33   why they might wanna do that now,

01:13:36   which are, to me, the two big ones I see

01:13:38   are the screen to get everybody on 16 and nine.

01:13:42   everyone on a five yep everyone on a five inch screen right yeah four inch

01:13:45   screen 16 to 9 aspect ratio and to get everybody on to a lightning adapter yes

01:13:54   that's a big thing that no one really talks about but uh that's still a

01:13:58   problem for them right that there's so many devices out there that are not on

01:14:01   this lightning adapter and it would be if they followed the old so I'm this is

01:14:06   this is just a theory of mine is that they're going to when they're announced

01:14:10   this, they're gonna stop selling the, well obviously the 4. The old

01:14:17   strategy would have been that the 4 would go out the door. The 4S would be

01:14:22   free. So I think that they're gonna get rid of the 4 and the 4S. Which again

01:14:28   makes sense because it doesn't have the 4-inch screen. So that eases

01:14:32   developer pain a bit. Yeah and kind of pushes everything forward. Especially if,

01:14:38   And I don't know your thoughts on this, but if they do want to do a different size again,

01:14:44   slightly larger than 4-inch screen, they have to get rid of the 3.5-inch screen when they

01:14:50   do that, right?

01:14:51   I would think so.

01:14:53   I don't know.

01:14:54   I mean, the only way I could see it…

01:14:55   Well, yeah, I just think that they want to get rid of that.

01:14:59   I think it's more about the aspect ratio than the size because in theory, and the rumors

01:15:04   are that this, you know, the low-cost, you know, if the leaks are true, if the cases

01:15:08   are true, it's the same size as the iPhone 5. In theory, I could still see them coming

01:15:16   out with a physically smaller phone that maybe would have a 3.5-inch screen, but it would

01:15:22   be 16 to 9. It would be in the aspect ratio.

01:15:25   So it's skinnier?

01:15:26   Yeah, or, you know, and shrink the chin and the forehead or something like that. You know,

01:15:31   it so that the device is almost just the size of the screen. I could see them doing that.

01:15:38   Not by a lot. Maybe three and a half is too small if it keeps the aspect ratio.

01:15:41   Right, but 3.7 or something.

01:15:43   Right.

01:15:44   Yeah. That's interesting. I hadn't thought about that.

01:15:47   You know, I don't expect it, but I wouldn't be shocked. And I think if they come out with

01:15:51   a bigger one to address the people who really do want a bigger screen, again, the aspect

01:15:56   ratio I think would probably most certainly stay the same, 16 to 9. I really do think

01:16:01   want to get everybody on that. And I think getting rid of the 30-port adapter just makes

01:16:06   sense. I just feel like at this point it looks … it just looks antiquated. And so the idea

01:16:09   of them selling the iPhone 4S for another year, it just seems outdated.

01:16:14   Yeah. I think that that's all pretty good reasoning for why they would do it right now.

01:16:22   I also wonder how much … because I have my old 4S right here in front of me because

01:16:27   you're using it for testing, iOS 7.

01:16:31   It's a premium product, right?

01:16:36   It's got this steel band around the side,

01:16:39   it's glass front, or glass back,

01:16:42   and it just feels premium.

01:16:44   And I can't help but think,

01:16:46   I don't know how big a cost of the device

01:16:48   the premium materials are,

01:16:51   but however much that the chips have gotten cheaper,

01:16:57   Obviously, when the 4S came out, it was a cutting-edge mobile processor, cutting-edge

01:17:02   mobile GPU, and now it's two-year-old technology.

01:17:06   It's certainly a lot cheaper.

01:17:08   The glass and the steel still cost the same.

01:17:10   Whereas, if you really want to get a lower unsubsidized price, I feel like switching

01:17:16   to a new material makes a lot more sense.

01:17:19   Mad Fientist And how much do you think – I know it's

01:17:22   of silly, but it may be silly to discount how much sort of customization. We see that with the new

01:17:29   Moto X thing, where they're highly customized just from a color perspective. And so that's the rumor,

01:17:35   of course, with this lower-cost iPhone, that they would have maybe some different colors. And

01:17:41   certainly that's been the case with the iPods for a long time, the iPod Nanos at least.

01:17:44   And so how much do you think that that plays into it? Do you think that that's important for them?

01:17:51   I guess. I think it is starting to get old. I mean, I'm just going to buy a black one,

01:17:56   but I feel like it's starting to get old that you can only get them in black and white.

01:18:00   And I'm just staring here right now ever since we were talking about it a few minutes ago at

01:18:04   the iPod Touch page. And to me, it looks more appley to have an array of colors of a device.

01:18:10   And certainly with the new i07 color palette, you could argue that more colorful is sort of

01:18:17   the way they're going. So here's a question, though. I wonder,

01:18:20   I mean, I just presume, and it seems like the rumors are way more about the lower-cost

01:18:25   iPhone, the "iPhone 5C" than the presumed iPhone 5S new high-end phone.

01:18:35   But if they come out with the lower-cost one and it comes in five colors, can they still

01:18:41   do the high-end one just in black and white?

01:18:43   I mean, presumably they want people to buy the preferred if they bought the more expensive

01:18:48   one, of course.

01:18:50   but are they gonna cannibalize--

01:18:51   - Just think about what they did with the regular iPod

01:18:56   and then the iPod Nanos, right?

01:18:57   So the Nanos were in colors,

01:18:59   the iPods remained in black and white, right?

01:19:01   They had the U2 one or whatever, but yeah.

01:19:07   So I don't know, I have no idea,

01:19:09   but I would guess that maybe they do do that.

01:19:10   And the selling point on the higher end is,

01:19:14   you know, like you're saying, this is the premium product,

01:19:16   this is the top of the line,

01:19:18   the best we can do for everything.

01:19:20   It is a faster processor, it has more RAM,

01:19:23   which they won't talk about, and maybe it has,

01:19:27   you know, the fingerprint reader, as I've been rumored,

01:19:30   and that's like sort of the marquee differentiator

01:19:34   of like what's new about this device.

01:19:36   - It'll have a better camera, for sure.

01:19:37   - Better camera, right, yep.

01:19:39   - Right.

01:19:40   - And so, maybe they do just rely on that,

01:19:42   if you want this, go with this, if you're interested

01:19:45   in sort of personalization and fun and colors,

01:19:47   Maybe they think that that's more the teen market,

01:19:51   or some other market that they're going after.

01:19:54   Maybe they think that they can differentiate those enough

01:19:56   where it makes sense to do that.

01:19:58   - I wonder too, I would love to know,

01:20:00   I don't know who could do such a survey,

01:20:03   but I would love to know what percentage of iPhone users

01:20:08   use a case with their device.

01:20:10   - Yeah, that would be interesting to know.

01:20:12   I'm certainly, I'm in the heart of the bubble

01:20:17   for this where in San Francisco, it's sort of considered,

01:20:22   I've had this discussion with many people,

01:20:23   it's sort of considered a faux pas to use the case, right?

01:20:26   And you even, I remember the event all those years ago

01:20:30   at Intenagate, right, where you asked them,

01:20:33   is anyone using the bumper?

01:20:35   And they all, Jobs and Cook and everyone pulled out

01:20:37   their bumperless-- - Bob Mansfield, right.

01:20:39   - And Bob Mansfield, right, they pulled out

01:20:40   their bumperless iPhones.

01:20:42   And so I feel like it's sort of a faux pas

01:20:44   and like in the tech sphere to use a case,

01:20:47   I certainly don't use a case, except when I'm using the Mophie to recharge it.

01:20:52   But I would bet that it's a much, much higher percentage use a case in the day-to-day regular

01:20:59   world out there.

01:21:00   Yeah, we were at the family, we were down at the Disney World last week.

01:21:06   And I was doing two things.

01:21:10   I collected a whole bunch of pictures of people using tablets as cameras.

01:21:14   I do say tablets. Most of them overwhelmingly non-surprised were iPads, but I saw a few

01:21:21   Obviously 16 to 9 ones which meant that they were you know Android tablets of some sort yep

01:21:27   But I was also I just was looking I've had this on my mind thinking about this plastic iPhone

01:21:32   I was looking at people's iPhones and at Disney World which I think is a pretty good cross-section of the whole country

01:21:40   Yeah, Disney World in July boy. I would guess

01:21:44   That's 75 80 percent of the people had him in a case

01:21:47   And it was really I don't doubt it. Yeah

01:21:51   Really and that and so do sec do you think that that goes back to the idea of

01:21:57   Personalization or protecting it. I think it'd be both of course

01:22:01   I think it's both because the cases that I was seeing were especially you know I

01:22:08   Don't think it's a surprise especially the cases that women had were very colorful or patterned

01:22:14   You know

01:22:16   Just everything any you know you any almost any sort of just go and look at the wall of

01:22:22   Cases like at the Apple Store, and I you know you see all of them in real life. Somebody's buying every one of those I

01:22:29   Wonder though with the plastic if it's a plastic iPhone will people see the need to buy a case for it

01:22:35   Yeah

01:22:37   Yeah, potentially not, though, I don't know.

01:22:40   I think this is one of those things we'll be surprised about, where people do anyway.

01:22:45   Yeah, because it's not like we haven't had plastic iPhones before.

01:22:48   We had the 3G and the 3GS, and I seem to recall that in the real world, most people put them

01:22:52   in cases.

01:22:53   Yeah, they just...

01:22:56   When I first got an iPhone, ridiculously, I insisted on getting one of those peel-over

01:23:03   screens, like the plastic protector thing.

01:23:06   It's like, I can imagine doing that right now,

01:23:09   but it was just in my head that I needed to do that

01:23:13   each time, like I was protecting it.

01:23:14   And so I just did that until they started talking

01:23:17   about the whatever, the--

01:23:19   - Oleophobic.

01:23:20   - Oh yeah, right, exactly.

01:23:22   - Oleophobic coding.

01:23:23   - Yeah.

01:23:25   - Yeah, and I've, over the years, I've always had good luck

01:23:28   with my iPhones not carrying them in a case.

01:23:30   I've never had one shattered.

01:23:32   - Yeah, neither have I, which everyone thinks

01:23:33   is so strange.

01:23:35   This one I guess is nine months old.

01:23:37   I have one tiny scratch on the glass and it's only visible against like a white background

01:23:44   and only when I hold it at a certain angle.

01:23:46   It's a tiny little hairline scratch.

01:23:50   I mean it's almost – I would venture to say it's – the screen at least is – would

01:23:56   be qualified as near mint.

01:23:59   And that's – I'm not particularly careful with it but I don't know.

01:24:02   I think a big part of it is the personalization.

01:24:05   I do think people are cautious because I think people see that their iPhone is a valuable

01:24:11   thing that you carry around in your pocket.

01:24:14   So it's certainly part of it.

01:24:15   But I think the customization, the personalization is a huge part of it.

01:24:18   Yeah.

01:24:19   I mean, and the fact that Apple carries so many cases in their stores, like you were

01:24:23   saying, says that they recognize that too, I think.

01:24:28   Yeah, totally.

01:24:30   So let's wrap it up.

01:24:31   I will say this though.

01:24:32   There's one more thing on the future and what's coming up in the next year or two from Apple.

01:24:37   Just tossing it out there.

01:24:38   I know that the watch, the iWatch, is certainly one that a lot of people seem to almost expect.

01:24:45   Businessweek and others have literally reported that there are people working on it.

01:24:50   I just don't see, fitting it back in with your thing about another iPhone size hit,

01:24:55   I just don't see how anything that you wear on your wrist, no matter what it does, could

01:25:00   possibly grow into an iPhone size business because I don't see how it could possibly

01:25:04   cost more than 200 bucks.

01:25:07   Like no one – I just don't think anybody is going to buy – if it costs as much as

01:25:11   an iPhone, which is $600, $700, $800, some people would buy it.

01:25:15   But nowhere near as many people would buy it as who bought an iPhone.

01:25:19   So it wouldn't – it couldn't – even at the same price as the iPhone, wouldn't

01:25:22   make nearly the amount of money the iPhone does, no matter how cool it is.

01:25:26   And if it's 150 bucks, then there's no way for, even if everybody who bought an iPhone

01:25:34   bought one, which would be huge, it wouldn't make nearly as much money because it doesn't

01:25:38   cost as much.

01:25:39   There's no way the iWatch can be the iPhone financially.

01:25:42   I totally agree.

01:25:44   And this has been sort of an interesting discussion just amongst watch people, right?

01:25:48   Because it's like watches are considered, for many people, a premium product.

01:25:53   You can go buy a watch that's tens of thousands of dollars. And many people buy watches that are at

01:25:58   least several hundred dollars, if not a thousand dollars, but that's a premium product. And could

01:26:04   Apple potentially tap that market? I don't know. I think that this watch, I think it's almost like,

01:26:10   in a way, a misnomer to call it a watch. It's going to be something that lives on your wrist

01:26:14   and is doing all different kinds of things beyond telling time. It may look like a watch, but it's

01:26:21   It's really going to be a screen that's on your wrist, a screen and a monitor for different

01:26:25   health things or whatever that resides on your wrist.

01:26:28   It's a computer on your wrist.

01:26:30   It's not a watch.

01:26:31   And so I think that they'll have problems trying to go after the nice watches of the

01:26:37   world, certainly because the design will have to be different than what those are, of course.

01:26:43   And so I do think you're right.

01:26:46   I think that they'll probably do a couple hundred dollars,

01:26:49   $300 price point at most for something like that.

01:26:52   And the latest thing I heard on that,

01:26:55   I don't know for sure, but it's a ways out still.

01:26:59   We're talking next year, not this year.

01:27:01   I think there's, not to go into rumor central here,

01:27:07   but the latest things I've heard are that some sort

01:27:12   television product, not necessarily a television screen, but something, and could be coming

01:27:20   as soon as this November.

01:27:23   And I think there's some surprises there about what it could actually be.

01:27:28   And I don't know this for sure yet, but there have been whispers about...

01:27:31   And so I'm not gonna write anything about it, but it's just...

01:27:34   There's whispers out there that the interaction with it could be the interesting thing.

01:27:39   have talked about voice, but I think that that might be out the window, and there might

01:27:43   be some new way to interact with whatever this thing is.

01:27:46   Yeah, I wouldn't be surprised. And that's a way that both, in a way, both of those mythical

01:27:51   products are like the iPhone, maybe. And to your point about the watch not really being

01:27:57   a watch and not really competing with Seiko and Omega and Rolex or something like that,

01:28:04   it wouldn't be any more of a watch than the iPhone. It was just a phone, right?

01:28:08   Yeah, exactly.

01:28:09   - It's about putting a tiny little laptop in your pocket.

01:28:13   It was a computer, not a phone.

01:28:15   It just happened to also make phone calls.

01:28:16   I think the watch would be the same way.

01:28:19   - And that's the mistake.

01:28:20   One of the main mistakes people make about Apple,

01:28:22   I think, is that they think,

01:28:24   oh, they're gonna go after the phone category,

01:28:26   they're gonna go after the television category,

01:28:27   they're gonna go after the watch category.

01:28:29   But the way that they think about it is

01:28:31   they're not going after any specific category,

01:28:35   being pigeon-holed into going after something,

01:28:37   Because if they do that, that's going to be a failure

01:28:39   of a product, it's just something they're trying to like

01:28:42   sort of extend what people already know

01:28:43   and make it slightly better.

01:28:44   The only way that Apple succeeds at all these things

01:28:46   is to make it so much better that people have to buy

01:28:49   this new thing that isn't just a watch,

01:28:52   it's not just a phone, and it's not just a television.

01:28:54   - Yeah, and I think on your point on the TV

01:28:56   and the interaction model, that's really the key

01:28:59   to the iPhone's success was that everybody's idea

01:29:02   prior to the iPhone for how to make a more computery,

01:29:07   smartphone was to have had more and more buttons and lots of buttons and

01:29:11   keyboards and and wheels and so on

01:29:13   and it's the interaction model that was really the breakthrough with the iphone

01:29:16   words no we're gonna get rid of all the buttons except for one and then you just

01:29:20   touch stuff on screen and we're going to do it on software and

01:29:23   yep i feel like there's i don't know what it is you know i'm terrible at at

01:29:28   conceiving ideas like that but i do think i think that's maybe where the

01:29:31   future of apple t_v_ is i mean 'cause right now if there's one thing that's

01:29:34   the most disappointing about apple t_v_

01:29:36   is that it still is just the interaction model is a

01:29:39   infrared

01:29:41   remote without down left right

01:29:43   yes right and you know they're trying to be just started doing what it was

01:29:46   bluetooth sinking right with the uh... was so you can use your phone for it but

01:29:50   i still think that there's there's going to be a different way whether it's

01:29:53   whether it's not your movement or something there's going to be a way that

01:29:56   they that they break uh...

01:29:58   yeah i think the mold of the way that you interact with it right right i think

01:30:00   that the breakthrough has to be more i mean maybe it's still a remote of some

01:30:04   sort of, I don't know, I have a bad idea of imagining it. But it's got to be more than

01:30:08   just switching from infrared to Bluetooth. It's got to be, you know, there's got to be

01:30:12   some kind of potential great leap forward in the interaction.

01:30:15   Yep. That's another one too though where I just don't see how it could make as much money

01:30:19   as the iPhone. Yeah, I mean, so Apple TV as it is currently

01:30:25   made up is, it does, it is doing very well, right? And it's because it's $99. And, you

01:30:32   the most compelling thing about this new Chromecast thing is that it's $35. These are things that

01:30:36   are sort of no-brainers to buy because they're so cheap. The television, everyone's focusing on

01:30:42   an actual television. It would have to sell for at least a couple thousand dollars. If they do that,

01:30:51   the TV market is just so different than what the phone market is. No one's going to subsidize it.

01:30:57   No one's going to subsidize it.

01:30:58   Well, I guess in theory, maybe they could work out a deal

01:31:01   and get Comcast to subsidize it.

01:31:04   That's interesting.

01:31:05   That's interesting.

01:31:06   But they're not really in the business of that.

01:31:08   I don't know.

01:31:08   It would be shocking to me if that's what it turned out to be.

01:31:12   But I guess it's possible.

01:31:14   But it's the only way that if it is, in fact, a $2,000 TV set,

01:31:19   that's the only way it would work at scale

01:31:21   would be to somehow figure out a way to sell it subsidized.

01:31:24   because normal people aren't gonna replace their TV

01:31:27   just 'cause Apple came out with a TV.

01:31:29   - Right, and if they do buy the one,

01:31:32   first Apple theoretical television,

01:31:35   it would be, what is it gonna be, five years

01:31:37   until they buy another one?

01:31:38   They're not gonna upgrade every year,

01:31:39   and they're not even gonna upgrade every two years.

01:31:41   - Right, one of the other ways that the phone market

01:31:43   was such a perfect opportunity is that people,

01:31:45   even before Apple got in, were already sort of in the habit

01:31:49   of getting a new one every two to three years.

01:31:51   - Yep.

01:31:52   - And just gonna-- - Yeah, and getting a new TV

01:31:53   a hassle. It would be a hassle. It'd be, you know, you mount it or it's just a heavy clunky thing to

01:31:58   move in and out of your living room. And the same selling points don't work. Like, people upgrade

01:32:04   to the new iPhone because it has a better camera often. You know, there is no such thing on a

01:32:09   television. The speed... Sorry.

01:32:10   You can upgrade your cell phone on a whim, really.

01:32:14   Yeah. Yeah.

01:32:16   You can't do that with your TV.

01:32:18   No. And so, yeah, I don't know. I would be surprised if there's some sort of actual screen

01:32:28   television anytime soon. I would look for something more akin to what we already have

01:32:35   with the different thoughts around it. And the app model is just there for the taking.

01:32:40   I mean, they're gonna destroy that.

01:32:42   Right. But I just don't see it as being an iPhone-sized business. And I feel like that's

01:32:46   where they might run into problems with investor relations.

01:32:50   - I mean, can you think of anything in the world

01:32:53   that would be an iPhone-sized business?

01:32:55   I keep making the joke that they would have to get

01:32:57   into the oil business to do something like that.

01:32:59   - Or cars, I don't know.

01:33:02   I mean, I know, and I'm certainly not the first,

01:33:03   just as a blue sky idea that what if Apple bought Tesla?

01:33:08   I don't see it happening.

01:33:10   - Yep.

01:33:10   - But just in theory, if they did and turn Apple stores

01:33:14   into car dealers, potentially that seems like a big business

01:33:19   because cars cost 20, 30, $40,000,

01:33:23   and you don't need a huge market share

01:33:25   to have that turn into a lot of money.

01:33:28   But that's the only other thing I can think of

01:33:29   that people buy that is very expensive.

01:33:32   - Yeah, I think you're right.

01:33:35   That's one of the few things that they could do

01:33:38   that would have a meaningful impact

01:33:40   on revenues and profits.

01:33:42   something of that, of just that size.

01:33:44   - Yeah, so I don't know.

01:33:46   I mean, and I think that the potential is there

01:33:48   for Apple to have a really healthy,

01:33:50   I think, like you said,

01:33:51   Apple TV's already doing well in terms of numbers.

01:33:53   I think it could go even higher.

01:33:54   I think that they could monetize it further

01:33:57   with an app store for it.

01:33:58   I think it could turn into a great little business for Apple

01:34:01   but it would just wouldn't be iPhone-sized.

01:34:04   - Yeah, the only other thing that they could do,

01:34:08   I think you're right, cars,

01:34:11   And then there's the unknown, right?

01:34:13   There could be some new market

01:34:14   that no one's thinking about right now,

01:34:15   like the very first PCs, right?

01:34:18   Like they would have to conceive

01:34:20   of some entirely new market,

01:34:22   which would be impossible for us to think about right now,

01:34:25   whatever they may or may not be dreaming up.

01:34:29   But that may be a once in a lifetime thing for a company

01:34:33   and Apple's already done it.

01:34:34   You could argue they've done it a few times, right?

01:34:37   So the likelihood that they do it again

01:34:38   is diminishing each time.

01:34:40   Right, jet packs or something like that.

01:34:43   - Right, right.

01:34:44   - Or Rosie, what was the Jetsons robot?

01:34:47   Rosie the robot. - Yeah, Rosie the robot, yep.

01:34:49   - Yeah. - Yep.

01:34:50   - Yeah, something like that.

01:34:51   That's the only way.

01:34:52   Anyway, thanks, great show, MG.

01:34:55   Really appreciate the time.

01:34:57   I thought this was a great show.

01:34:59   - Yeah, good stuff.

01:35:01   - Thank you very much, and everybody can find out more

01:35:04   at your website, parislemon.com.

01:35:07   - Yep.

01:35:08   - Follow you on Twitter.

01:35:09   Everybody should follow me on Twitter.

01:35:11   Except when I tweet about sports, but you do a lot too.

01:35:14   Yeah, exactly.

01:35:15   Oh, freakin' Yankees.