The following is a rough transcript which has not been revised by The Jim Rutt Show or by Robert Tercek. Please check with us before using any quotations from this transcript. Thank you.
Jim: Today’s guest is Rob Tercek. Rob is an award-winning author, entrepreneur and educator focused on the process of dematerialization and innovation. He has served as the president of digital media at the Oprah Winfrey Network, he was senior vice president of digital media at Sony Pictures, and he was creative director at MTV.
Jim: I never watched MTV. My daughter used to watch something that came on every afternoon, RTL or something like that, some three letters, some damn thing. It was all the boy bands of the mid ’90s. But it was certainly a major cultural force back in the day.
Jim: Rob’s also got lots of startup experience. He’s co-founded five new ventures, including 7th Level, a pioneering game publisher that went public in 1993. These days, Rob is the founder and CEO of General Creativity — now that’s a good name, I like that one — a strategic advisory firm that provides insight and advice to corporations as they contend with digital transformation and the process of dematerialization. Welcome, Rob.
Robert: Thank you, Jim. It’s great to be here.
Jim: Yeah. Yeah, Rob and I have had an ongoing conversation, I don’t know, two or three months, and there’s been some very, very interesting conversations. So I said, “Well, I got to get this guy on the show.” And I looked up his book and did a little bit of sniffing around, and I said, “Oh, this thing will be interesting.”
Jim: So today we’re mostly going to talk from his book, Vaporized: Solid Strategies for a Dematerialized World. And the book is, I don’t know, what, five years old, six years old, something like that, but it’s held up surprisingly well. I’ll point out a few places where you were wrong, just because I can, but we’ll also update a lot of things as we go.
Jim: I think it’s a really solid framework. It sort of caught the world at that time in mid-transformation, in some sense. And of all the things that you talked about or speculated about, the vast majority of them have continued, though sometimes in some surprising ways, and we’ll talk about that.
Jim: So let’s start with Vaporized. You literally use it as a metaphor, but you take your metaphor a little bit more seriously than some. You actually lay out the comparison with three phases of water, ice, liquid and vapor, as applied to the information sphere. Why don’t you do that for us?
Robert: Yeah, sure thing. Yes, it is true. I take the metaphor very literally. And so if you think about your fifth grade science class, where they talked about different states of matter, matter can exist in three, maybe four states. But the three that we’re conventionally thinking about are going to be as a solid, where the molecules are packed closely together, and as a liquid, where the molecules are slightly less densely packed together and they can flow in a certain direction, and as a vapor, where the molecules are farther apart and they can move very, very quickly.
Robert: Well, it turns out that information exists in the same three states. Information as a solid is how we transmitted knowledge from one generation to the next. And that was typically a book for the last 500 years, but prior to that it was carved in a stone or written on a wall in some fashion that would outlast the short human lifespan.
Robert: But with the advent of electronic communications, and in particular, the focus of my book is the advent of broadband, suddenly you had a shift towards information in a liquid state. This is information that can be transmitted through a pipe, and suddenly our information services start to take on… they somewhat resemble a utility. The same way that you’ve got indoor plumbing and water on demand or electricity on demand, you now have information on demand.
Robert: But there were limitations with this as well, with the residential broadband, because in the early days of residential broadband, around 2000, you still had to be connected to some sort of device that had a wire connected to the wall, typically a home computer. And so you couldn’t really get the information where you needed it.
Robert: And the next big step was information as atmosphere. So this is information in a vaporized state, just to fulfill the metaphor. And information as atmosphere is all around us. It’s literally atmospheric. You can download it to your mobile phone at any given time. And with the advent of the modern smartphone in 2007, 2008, and then the rise of 4G telecommunications in the early 2010s, suddenly billions of people had information at their fingertips. This is a situation we never had before.
Robert: The consequences were fast and dramatic. That’s what the book looks at, and then the book kind of speculates further. And candidly, Jim, I was trying to find out where the metaphor breaks. So I pushed it as far as I could, and as you know, into some absurd directions that I hope we can get into later.
Jim: Oh, yeah, we will. My one thing I like that bitch a little bit about is you sort of assume that all this stuff started with the internet, but it of course didn’t. There was a whole epoch before the internet. In fact, I worked for the very first consumer online service called The Source. Went to work for them in 1980. We had most of the stuff we have on the web today at dial-up 300-baud modem, $10 an hour.
Jim: You go, “Now, why would anybody pay 10 bucks an hour to chat at 300 baud or whatever?” Because that was the only way to do it. If you’re a cutting-edge dude and you wanted to do it, you had us, and then soon thereafter we had CompuServe, and there was a whole generation, CompuServe, Prodigy, and then the big one, AOL.
Jim: AOL was huge in the pre-internet world, and they played the internet all wrong and crashed and burned, one of the great missed opportunities. Actually, Steve Case, who I know a bit, I knew his wife better, he feels real bad about the whole thing. I said, “Steve, you’re fucking a genius. You bought Time Warner at the very tippy top.”
Robert: That’s right, he did well for his investors. But also, it’s a stepping stone, right? It was a transitional phase.
Jim: Yep, though it could have been, I mean, again, a lot of things. And the other thing I like to do to kind of extend this is to talk about the walled garden, because before the web, Prodigy, CompuServe, The Source, all of them were walled gardens, right? They were public utilities that brought you into their servers, but you couldn’t get back out again. And in fact, even email for the longest time didn’t have any interoperability until the late ’80s or early ’90, ’91, and so it was a walled garden.
Jim: Then suddenly the web came along, and the beauty of literally the web-underlying architecture, HTML, is that it is by definition designed to interconnect everything. And so we had this amazing world of the web.
Jim: And then your third phase, vapor, goddamn apps. When apps became popular, my comment was, “The empire strikes back,” because apps are much more walled-gardenish.
Robert: And app stores right now. Look at the battle between Epic and Apple right now, right? You’re seeing the same closed-garden battles playing out in front of us every day.
Jim: Yeah, it’s kind of unfortunate in some ways that the app world didn’t preserve the openness of the web, but we’ll talk about that as we go along.
Robert: Yeah, yeah, because it’s not over. This is like a boxing match, and we’re maybe in the second or third round at this point.
Robert: Now, Jim, just a couple of thoughts to tie some ends together there. So you really bring up two big points. One is this kind of pendulum swing between centralization and decentralization. That’s probably the epic struggle of the information sphere. And who knows, that might extend out to other industries that are touched by information.
Robert: For instance, automotive might become less centralized in these gigantic megacorporations in the future with electric vehicles and robotic vehicles. So that centralization versus decentralization struggle continues, and it isn’t over yet. And it shows up in different battlefields. Right now, cryptocurrency is one.
Robert: But the other thing that I want to point out, you’re absolutely right that there were epochs that preceded where my book begins. You can’t cover everything in a book. Did you know, just to connect MTV to AOL, did you know that when AOL was wanting to go public and grow, that Steve Case recruited a bunch of people from MTV, including Bob Pittman, who had been the CEO?
Jim: Oh, that rat fucker, he’s a bad dude. He’s the one that ruined AOL.
Robert: Your words, not mine. Okay. But he also, because he came out of cable, very well understood the closed garden, because cable TV, it was absolutely the best business model for media of any sort ever in the history of humanity. And so he wanted to replicate that and impose that same thinking on the internet, and for a little while it worked.
Robert: But even then, they understood their dial-up business was melting like an ice cube in the sun, and had to get out of that. That’s why they bought a good asset, Time Warner. So I credit those people from MTV, without casting aspersion, I credit them-
Jim: Oh, I cast aspersion. I knew a bunch of them. Who was that piece of shit that ran their advertising business? He was another creepo deluxe from HBO. He’s one of the few people I ever met in business, if I saw him across the street, I’d cross the street to beat his ass. He was a lying sack of shit. He’d lie straight to your fucking face. Bad, that whole bunch. They were a bad bunch. They ruined the online industry in some sense.
Jim: Sorry I got so worked up here, but this happens to be one of my pure pet peeves that those creepos came in from New York and corrupted the online business.
Robert: Yeah, we’re still dealing with the consequences, because clearly app stores are built on the exact same premise. So we deal with it every single day. When you download an app or you download a game, you’re dealing with that mentality, that closed ecosystem mentality that really goes back to cable television and guys like John Malone. They were the original architects.
Jim: Ah, John Malone, my antihero. If I ever write a novel of this epoch, John Malone will be the James Bond opponent.
Robert: Yeah, he’s Spectre, that’s true. Hey, look, he’s brilliant. He’s always on the right side of the deal. This recent deal where AT&T spun out Time Warner, a disastrous acquisition gone sideways, and they-
Jim: They’re still going to make more money out of it. You think Bezos is smart, Malone is smarter, right?
Robert: Yeah, and he doesn’t leave any fingerprints on the weapon as well, which is really crucial, I think.
Jim: There’s an interesting just datum for people who want to think big about what the really smart guys do. The largest property owner in the United States is John Malone and has been for the last 25 years. But Bezos is now number two, and Bill Gates is number three. They both have hundreds of thousands of acres of interesting raw land that they have bought all over the United States. But Malone is the guy that started that, again.
Robert: Back to dematerialization, it’s very interesting that the people who make a fortune, the tycoons that make a huge fortune in dematerialization and digitization, they end up converting a big chunk of their gains into the most tangible asset in the world, real estate.
Jim: Even beyond real estate, land, right. This isn’t even just office buildings, this is farms, ranches, forest. It’s the other extreme. And I’m just in awe of Malone, I must say. Of all the business guys, as you said, I’ve never seen anybody who is always right.
Jim: Remember, he started out just as an employee. That’s the amazing thing. He didn’t actually start anything. And from the position of working for TCI, you know, in a senior role, he has managed to build one of the great fortunes of the world and, as you say, leave no fingerprints anywhere. And most people don’t even know he exists.
Robert: Two brilliant geniuses, they’re admired, but their great insights are often overlooked. One’s John Malone, and one is Bill Gates at Microsoft. Both of them understood early on that the value is in the software, and it’s not necessarily in the hardware. And in Malone’s case, he was working for a cable operator, TCI, what you said, he did not own. He was an employee there, and he was very senior executive there, CEO eventually, supervised the roll-up of a bunch of cable systems. But he gradually realized that the value was in the content, not in the cables in the ground. And so then he created Liberty.
Jim: Yeah. Liberty is the great little vehicle. I always follow Liberty, right, and whatever Liberty does, invest the same stuff Liberty does and you’ll do well.
Robert: Exactly right. And then Bill Gates’s insight was around the same time in the 1980s, where he realized that the operating system was valuable, and it was content and it could be copyrighted. All those things were innovations.
Robert: And if anyone has made a fortune in, or even benefited from a job in, the software business, you owe a great deal of gratitude to Bill Gates, because he’s the person who fought tooth and nail against the hardware companies to ensure that software had value. And he was so good at it.
Robert: Eventually, of course, he extracted most of the value out of the PC business with his collaborators at Intel, so that became the biggest part of the cost of goods. When you bought a computer, you were paying mostly a license fee to Microsoft.
Robert: But both of those guys were visionary in the sense that they saw the value in an intangible asset that was running on hardware. Most people thought that the value was in the hardware. And I’m talking about people doing this in the 1980s. It’s very early, right, that’s an early insight.
Robert: Today, of course, it’s perfectly obvious, right. Everybody’s trying to figure out ways to substitute software for some physical thing that gets you there faster, cheaper. You can innovate much faster with software. So the benefits of dematerialization are becoming more clear by the day.
Jim: There is, of course, and you allude to it in the book in some detail, the famous story of how Gates managed to play IBM for fools. A lot of it’s bad, bad strategy by IBM, weird luck by the fact that the guys at Digital Research weren’t there the day that IBM showed up or out playing golf, I’ve heard all kinds of different stories, that Gates was able to buy DOS for 50 grand from Seattle Software. It’s a classic series of contingent accidents that happened to lock that thing in.
Jim: But look at the other side. I looked up this morning what percentage of Apple’s business is still hardware. What would you guess?
Robert: Well, about 70% of their businesses is the phone still, right?
Jim: Between 83% and 85% of their business is still hardware.
Robert: Yeah, that makes sense. But the fastest growing and most profitable sector for them for the last seven years has been software, which is worth paying attention to, because we tend to think of Apple as a computer company. Today, software sales is much greater than their iPad and computer business put together.
Jim: Well, the iPad business was bigger than I thought it was.
Robert: Yeah, it’s pretty big. Computer is not a very big business for them anymore, which is kind of amazing because, I don’t know, everybody I know it seems to have a Mac. Obviously the iPhone is still the lion’s share of their business, and they’ll do everything they can.
Robert: But here’s the interesting thing about that, because I get into this in some detail in the book, about platforms and ecosystems. When you control all the points, when you control the whole stack, you can choose where to take your profit margin. So Apple chooses to take their profit margin on hardware, and they drive historically high profit margins. Other computer companies have never been able to attain a 30% profit margin. Apple does it consistently.
Robert: They can manipulate the price in the sense that if they sense a competitor is going to undercut them, they’ll introduce a low-cost version just to clean out those low-cost competitors. They can do all this because they control the full stack.
Robert: And a lot of people will claim that they’re unfairly taxing content or they’re inhibiting content, they’re not letting content companies be profitable enough, because they’re taking their profit on the hardware. That’s possibly true. That’s like a content subsidy for hardware. Huge debate right now in the gaming industry.
Jim: Yeah, we’ll get to that in a minute. Yeah, just to give you the numbers, 2020 Q4, Apple operated a 33% pretax margin. Holy fuck, right, for a hardware business.
Robert: Just to put it in perspective, most hardware companies operate on about a 3% margin, and most of those Japanese electronic giants are now operating at like a negative margin at this point.
Jim: Yeah, and the old rule of thumb back when I was in business school was if you could get 10% pre-tax, you were a genius, right. That was the goal.
Robert: Now, this is why Tim Cook is the most successful CEO in the world and why he gets to be the head of Apple. People think Steve Jobs was the brilliant visionary. Of course he was, but in terms of being an effective CEO who drives value, there’s nobody on earth that matches Tim Cook.
Jim: And most of it was in building the supply chain, right. That was his job at Apple under [inaudible 00:15:31].
Robert: I hope we can get into supply chain, because it’s going to become very important now in this post-COVID era.
Jim: Indeed. Let’s go back now to how you really introduced the meat of the book and how you woke up to the story. Why don’t you tell the audience, and remember, probably half of them weren’t born yet, the story of Tower Records and your encounter with Tower and how that was what really opened your eyes to this whole phenomenon?
Robert: Yeah. I was talking to a group of businesspeople in Los Angeles — and this was quite a few years ago, this was in the 2000s — and they said to me, “What happened with Tower Records?” Because Tower Records had been iconic. It wasn’t just a record shop. It was a place you hung out. It was where you can see Axl Rose if you were there at midnight. He’d be in the store shopping as well.
Robert: And there was a famous series of incidents, legendary incidents, for the music industry. Their flagship store was located on Sunset Boulevard, right on the Sunset Strip near the Whisky a Go Go and the other great legendary rock and roll clubs in Los Angeles, so it was part of the music scene. It was kind of a fixture or an icon, same thing in San Francisco where it started.
Robert: But it was a victim of a thousand cuts, and then the final blow was the digitization and dematerialization of music altogether. There were lots of things happening in the 2000s, beginning with MP3 and the file-sharing revolution, Napster and Gnutella, that made it very hard for the music industry in general.
Robert: From 1999 till about 2010, about a 10-year stretch, the music industry revenue collapsed by 75%, so by 2010, it was only 25% the size that it had been in the late 1990s. There was a period of 15 years before that where the revenant music business was growing incredibly quickly because of CDs, selling a disc, selling a hard shiny disc as a substitute for selling the content.
Robert: But with MP3, you were able to liberate that digital content from the shiny disc and distribute it will because it’s digital. Well, the internet’s a copying machine. It’s pretty easy to make a million copies of something. And lo and behold, boom, the music industry was devalued.
Robert: So that made life very tough for retailers, but they were able to survive, and Tower was even experimenting with e-commerce. But what killed them was ultimately the ability to download over the air and the ability to play music back on your phone. You just didn’t need the whole apparatus of a stereo. You didn’t need the whole apparatus of collecting CDs. And so their core business product became obsolete.
Robert: What I point out in the book is that what ultimately killed them was Apple’s music store. And the interesting thing is that nothing in Apple’s music store was sold in Tower Records. Tower Records sold physical goods. Apple only sold dematerialized goods. And yet they were able to wipe the floor with not just Tower but every major record retailer, The Wherehouse and so forth, across the country. All these shops closed around the same time period.
Robert: But it was important for us in Los Angeles to notice that the flagship store for the music industry, which is not an insignificant business in Los Angeles, that the flagship store was gone, closed, gone for good. What that tells us is that with dematerialization, seemingly overnight, a habit that everybody had suddenly becomes a habit that nobody has, and we just don’t have use for this stuff anymore. Today you can’t even buy a CD player if you want. You’re going to have to find a used one on eBay, because nobody manufacturers DVD players or CD players anymore. There’s zero demand.
Robert: And so the habit that everybody had in the year 2000, by 2010 it was fast going away. It was disappearing really quickly, and with it, all the retailer. So the point about the retailer disappearing, it’s not just that we don’t shop at those stores anymore, it’s that we don’t even buy the products that used to be in those stores.
Jim: Yeah, that was key. It’s funny, one of the things, I was telling this story on Twitter the other day, for us Boomers, let’s say 1980s, 1977, the second biggest expense, capital goods that we owned, was our stereo, right. I’ve figured out I had about $700 worth of stereo equipment in 1978, when I was making maybe 12,000 a year, so that was a fairly significant amount of money. And it included a receiver and a nice direct-drive turntable, some speakers, which I’d shopped for for a month, auditioning them until I found just the one. Even a stylus was like $100, right.
Jim: And so you multiply that, today’s money, that’s at least $2,500 worth of stuff for my stereo equipment. And I was by no means an audiophile. That was good, solid middle-of-the-road stuff, Yamaha receiver, Technics turntable, Polk audio speakers, right, the three I happened to like. I still like the sound of them, especially together. But I knew people who’d spent a lot more than that.
Jim: And today, okay, if you’re a real freak, you spend 100 bucks for the Bose speakers, right. But most people, earbuds or $29 Logitech speakers or whatever.
Jim: And so to your point, I think this is one of the great points, that not only did Tower disappear, but I imagine the sales of like Yamaha receivers, stuff like that’s got to be de minimis compared to what it was in 1978.
Robert: Do you remember the days in the early 1980s when it was Japan, Inc. that was the big enemy from the East?
Jim: Panasonic, Sony, these guys are going to crush the West, right?
Robert: Yeah, exactly. Today, we’re all worried about China. Back in the 1980s, it was Japan that American business was concerned about. Japan was going to crush us, and leading companies in the vanguard were all the Japanese consumer electronics companies.
Robert: Well, from the launch of the Apple iPhone in 2007 until about 2016, in about a 10-year span, those Japanese consumer electronics companies experienced double-digit decreases in sales in every category, not just stereo equipment but also cameras and GPS units and radios, like every kind of consumer electronics device you can imagine, the sales simply collapsed.
Robert: A couple of years ago, I was giving a talk. I was invited to give a talk for one of the big consulting firms. And so I gave the opening talk about vaporizing this process, because it’s still continuing, and it was actually picking up steam. This was around 2017, 2018. It was really on a roll at that point. And I mentioned this point that the consumer electronics companies collapsed in that 10-year timeframe.
Robert: Well, little did I know, the next speaker was the CEO for Panasonic in North America. And he stood up on the stage after I was done. He said, “Well, I had a really good speech prepared, but now that Robert’s made those comments, I’m going to set my notes aside. I’m going to tell you what really happened.”
Robert: And he pulled out two fascinating slides… Because this is really cool. It’s not in my book. I wish I could include it. He just pulled two slides out of his presentation. He said, “This is our revenue from 2008, the economic crisis, to lets say 2018. I think that’s the time when we were doing this. And there’s a blip around 2008, 2009. It went down, and then it kind of clawed its way back up a little bit, but it was pretty level. That’s just total revenue.
Robert: Then the next slide broke out consumer revenue versus B2B. And what happened is after 2008, consumer revenue drops down to about 3% of Panasonic’s North American sales, like a single digit.
Robert: It had been more than 90% of the revenue. And what Panasonic did brilliantly, and the reason this gentleman gets to be the CEO of Panasonic in North America, is they pivoted into B2B businesses, and in particular, building out battery packs, the solar packs, basically everything that makes a Tesla run is developed by Panasonic in partnership.
Robert: This was a remarkable pivot. It has not been widely covered. It’s not a story you’re going to hear everywhere. I was blown away that he was so candid about this and so upfront about it. But his point was simply that, you’re right, we were faced with a crisis where demand shock hit us. Overnight, people decided they didn’t need to buy stereos. They didn’t need to buy electronics and so forth. En masse, the consumers went on boycott and they stopped buying all that stuff.
Robert: And, Jim, it continues. If you think about it, look at the change that’s happened to what a stereo is. A stereo used to be a thing with a box and its turntable and so forth, all these wires and all that. Now they don’t even have an interface. There’s not even a screen. Maybe there’s a couple buttons, but they’re just there in case your phone app doesn’t connect properly with the thing.
Robert: The consumer electronics companies have ceded the consumer experience to the app on your phone. They have given up control of the consumer experience and they have ceded that. And by the way, that started to extend into automobiles, into lots of other things, where things that we used to deal with personally, directly from the manufacturer or whatever, now they’ve given up. They’re like, “Just use the app. Just go to your phone.” That’s our habit.
Robert: And so what’s gradually happening, it’s happening more and more with younger and younger people, is that the phone becomes a central control point. It becomes a kind of remote control for the whole world. It’s where you start. Today my car, my door locks, my garage door opener, everything is controlled by my phone. It’s actually kind of nuts, because if you forget your phone or leave it somewhere, you’re really up the creek, right, you really are.
Jim: I know, talk to me. I’ll give you an interesting example. I was an early adopter of Sonos, which is this interesting home wireless sound system.
Robert: I hate that company now. Their sound is great. It’s just that they got caught in the crossfire between these phone platforms.
Jim: Yeah. So it’s interesting, I had the cool, beautifully made… Everything about it was beautifully made, optimized, dedicated wireless controller and this and that. And of course I still run it, here at my farm at least, through my last Yamaha receiver. That thing will last forever, built like a brick battleship. Anyway, they’d been hemming and hawing, and just this year, they-
Jim: Anyway, they’ve been hemming and hawing. Just this year, they basically stopped supporting in a radical way, all the old hardware. And you have to do it on your goddamn phone. I would just [inaudible 00:25:12] not. So I had to replace one controller and had to move full time to the app and all this sort of stuff. The game is over and the apps won. Before we move on, I want to move on to some of your interesting theory framework here because I got the guy here who’s thought about this. I’ve always wondered about iTunes. You talk about that. I thought Jobs was completely nuts when he focused on the selling of tracks, as opposed to streaming. Around the same time iTunes came out, there was a service that was launched, very well-funded, called Rhapsody, which was a streaming model. I still have a subscription to Rhapsody by the way.
Jim: They now call it Napster. They renamed it Napster, talk about bizarre but anyway, it seemed to me why the hell would anybody want to buy a track for a dollar? When for eight bucks a year, you had access to almost anything you could possibly want. And then they added an extra [inaudible 00:26:01]. It was $14 total. And you could download almost all the tracks on the MP3 devices. Now it is true that the Rhapsody software sucked for a long time. I used to send them emails occasionally saying, “Is there anybody in your shop that knows how to write preemptive, multitasking? I think you have clowns as your heads of engineering.” Right? I would send faxes to the CEO because one thing people don’t send faxes very often. So CEOs usually get them [inaudible 00:26:26].
Jim: I one time sent a fax to the head of Southwest Airlines on some fuck up they did. I got a seven page report back from their CTO, which was quite interesting, explaining what had happened and apologizing tremendously. I don’t know if it will still work. This was kind of a…
Robert: Hundred year old technology that still works.
Jim: In the double lots that still work, but anyway, Rhapsody was kind of bad execution, but it had the idea of streaming seemed to be so obviously, I just refused to get involved with iTunes at all. So long as it was, “buy the track.”
Robert: You weren’t wrong in the long haul. But in the short term, there was a bandwidth challenge. And remember bandwidth pricing was all over the map as well so for some people that would have been expensive. Steve Jobs is a lot of things and we could spend a lot of time talking about him, but with respect to business strategy, he was like Napoleon in the sense that he had a grand plan, he had a whole map in front of him, but he didn’t move the pieces until it was absolutely necessary to make the move. And so what he was dealing with, with the record label, they were against all forms of internet. You have to understand back in 1999, 2000 timeframe, all of Los Angeles was determined to have a war with Silicon Valley. We don’t talk about that too much anymore because now all those companies are gradually getting bought up or co-opted by the Silicon Valley giants.
Robert: But there was an absolute war between the two states and Steve needed music because iTunes was the linchpin for the iPod. And the iPod was really what saved Apple. Way before the iPhone came out, the iPod was where they were getting all their growth and all their traction. So he wanted a really simple way for consumers to get what they wanted. What they wanted was singles. And they wanted to listen to them all the time. Now we didn’t have the great connectivity so you couldn’t stream to an iPod at the time. That’s why he didn’t want to do Rhapsody. And remember also Apple offered the record labels to wrap everything with a special DRM.
Jim: Yeah, I remember that. Everybody hated him for that, right?
Robert: The labeled liked it. The consumers didn’t like it because it gave them no control over their library, but not only that, it gave Apple control over the record label’s libraries. And the record labels, they had done this disastrous partnership with Microsoft to create some sort of encryption system for music that they thought would save them. And it got hacked before it was even released by a group of researchers at a university. So the record labels couldn’t find their butt with both hands when it came to protecting their material and their content on the internet. So Apple looked like a savior, but what he insisted on was one price for singles. That was the quid pro quo. And so what jobs did was brilliant in a Napoleonic way, is he cherry picked the one thing out that would unbundle the entire music industry and cause tremendous repercussions, caused the whole thing to go.
Robert: As you know, from Jim Clark, there’s only two or three business models, bundling, unbundling and rebundling. And man, Apple is the epitome of that simple statement. They have done this again and again and again, where they’ve been able to find ways to unbundle an old business, cherry pick out the value and then find a new way to wrap that thing inside of a new bundle of services. And they’re doing it now. Now they’re trying to drive this sort of massive bundle of all the Apple services, their music and their TV, Apple TV, and the news service. They want to bundle all that together and give it to you for one low price so that you basically depend entirely on Apple for all your media consumption. That’s rebundling.
Jim: Yeah [inaudible 00:29:44]. That’s a perfect transition to the first of two, four part frameworks that you have in the book. And that is you call it “the new value bundle.” And it’s device software content and commerce. We started to talk about it a little bit, how Apple plays that game. Why don’t you talk about that a little bit more generally and maybe run through how the major companies play that game in differing ways, which was actually very interesting.
Robert: That’s the key point. I’m really glad you jumped to that because really that’s the main thing here. We spent some time talking about Apple and candidly, we could talk about them all day long. They’re a super interesting company, but what a lot of people tend to do then is think that what Apple does is the same thing that Amazon does or the same thing Microsoft does or the same thing Google or Facebook does. That’s not true. There’s room for strategic diversity. Companies have different strategies, even though what we’re talking about is a big transformation. We’re shifting away in the broadest sense. We’re shifting away from selling physical items in physical shops and we’re shifting towards selling dematerialized digital items in dematerialized stores or app stores or whatever that might be. That’s the big, broad trend. And it plays out in a million different ways in different industries.
Robert: It’s gradually working its way back through the value chain and the supply chain. That’s an interesting area to focus on because it’s evolving fast there. Okay. If you’re a big internet giant right now, you have a couple of different options, but you have to control some value points if you’re going to play in this space. The more value control points you have, the more likely it is you can create your ecosystem and dictate the rules to everybody else’s in that ecosystem. Not too different from the way Walmart operates in the real world, right?
Robert: One of those things is hardware. Apple gets the lead because they’ve got the Apple phones, Google Play is in the space as well because they’ve got the Android operating system that effectively gives them a layer of control over the data inside of all the Android phones, even though they don’t make all the Android phones and candidly, their phone business is relatively small. Amazon has attempted to be in the device business, but they’re not that great at it. Although, they’ve had some traction with speakers, they tend to have low end devices. Apple sells super premium devices. Amazon’s going the opposite way so there’s a good example of strategic diversity.
Jim: Yeah. I was just going to point out the… I tried to support the Amazon fire, but man, is that a pathetic piece of shit, right? They decided not only to go Android, but they don’t even go with the Google version of Android. They have the open source version of Android. They’re trying to boil the ocean themselves. And they’re just not very good at it. Not good enough because they’re amazingly good at so many other things, don’t get me wrong. I admire them.
Robert: They’re trying to cut corners. They understand as a value shopper out there, who’s different from the Apple customer, who’s a premium shopper, right? And they want to support that value shopper. That’s kind of in Amazon’s general ethos, is to be super consumer friendly. They’re obsessed about consumers, but when you’re going to make a cheap phone, you’re going to end up with a cheap phone. That’s the problem, is that there’s only so many corners you can cut before you degrade the product. And if people are going to use this thing constantly, and bear in mind, we touch our phones, something on the order of 150 times a day, so we’re really phone obsessed in an unconscious way. Anything you’re handling that much moves from basic utility into a fashion statement and something that you depend on and in some respects, your life depends on it. And so you’re not going to want a cheap device, you’re going to spring for the more expensive device.
Robert: The second thing is, there’s so many good Android devices out there. There’s lots and lots of substitutes that aren’t necessarily brand name that do the job better. Okay. That’s the corner of hardware. And you’ll notice there’s a couple of [inaudible 00:33:15] that don’t play in hardware. Facebook does not have hardware. There was talk of a Facebook phone five years ago, but that never manifested. Facebook is obviously a leader in VR. And when that comes about in a few years, probably five or 10 years out, realistically, Oculus might end up being a really brilliant investment. Right now, it’s not, but that’s a hardware play as well. Okay. So then the other pieces of the puzzle that you need, you need to have some form of transactional capability, a way to buy and sell stuff.
Robert: That’s what drives your ecosystem. That’s how you make your developers profitable. Without that, you’re not going to have a thriving ecosystem. That’s actually where every one of these companies is extremely focused, is managing and grooming the ecosystem. They do that by managing and controlling payments. There’s different angles on this four-part grid but the key thing is that each company plays a key role. They dominate at least three of these four corners. And then they get to choose where they want to take their profit. They get to decide which part of this is going to be their main focus. For Apple, it’s hardware. For Google, it’s advertising clearly, right? They are all about free everything. And they know that “free” is a great way to destroy competitive businesses. It’s the best mode there is. It’s sort of like the scorched dirt earth way to stop Napoleon from getting into Russia.
Robert: If you make the operating system free and the apps on top of the operating system free, you pretty well wiped out all the competition. And then Google gets to rake off the data assets and they monetize that with advertising. So each company has selected a different way to monetize, and then they use the rest of those four control points to [inaudible 00:34:51] our competitors, to stifle start-up companies, to force consumers into a behavior pattern that they can control and dictate. That’s how they continued to survive and thrive. By the way, this model’s work. As you pointed out, I wrote the book five years ago, here we are, 2021. No sign of it slowing down. If anything, these companies have doubled, in some cases tripled in size since I wrote my book.
Jim: Yeah, absolutely. Of course, you ended up with some weird results. One of the ones I bitch about every six months, I post this on Facebook. I go, “Tim Cook and Jeff Bezos, stop your dick waving competition. And let me buy a Kindle book off my iPhone Kindle app.” Can’t do it, right. That’s got to be the stupidest thing on the internet. And yet it all comes out of this game theoretic. These things that are playing, it’s like collateral damage to strategy. Maybe you could unpack that particular fucked up situation for the audience. How does that come about that neither side will give?
Robert: Okay. It goes back to Steve Jobs again. Steve was focusing… “We’re building the Apple App Store and we’re going to create a monetization function. Then we’re the retailer. And we’re going to take retailer slice on those transactions.” Remember the first iPhone did not have an app store, right? There were no apps in 2007. It’s 2008. They introduced the app store and the software development kit at the worldwide developer conference. And they promote the heck out of it. And developers immediately respond because there’s a business model attached. “We can make money.” It was possible in the past to make games for mobile phones. I did that for five or six years before Apple introduced the iPhone. It was tough because you had to cut deals with every individual mobile operator. With Apple, you just had to cut the Apple deal and there was no deal to cut. They just told you what the terms were.
Robert: They take 30% of every transaction. That was set in stone. Now at the time, Apple called this a “cost recovery operations.” That 30% was there to cover the cost of building the store, managing the traffic, dealing with customers, all that. Perhaps that was true at the time. However, as I pointed out earlier, this is become the fastest growing and most profitable sector for Apple now, is just raking that 30% fee off the transactions. Okay. So now you’re Amazon. Amazon is into selling, right. They’re a dematerialized storefront, and they want to be present on the iPhone because it’s a fast growing platform. So now it’s when ecosystems collide and gigantic egos collide with them, ugly results can happen. So Apple says to the Amazon, “Hey, look, we have this deal that everybody signs up for. If you build an app in our app store and you’re going to transact inside of that app, we’re taking 30%.” and Amazon says, “30% of our transactions, GTFO. No way. We’re not going to do that deal with you.” Right?
Robert: It’s war. You would think they could bend the rules that there’s a negotiation to be had. Apple won’t do it. It seems to me that they’ve sort of painted themselves into a corner. Again, we’re going to touch on this. If we talk about Epic and the big battle that’s happening there. Apple doesn’t want to flex off of this. They’re sort of stuck on this 30%. It’s now intrinsic to their business model. It’s strategic for them in the sense that this is a fast growing revenue stream, that they want to be known as a services’ company. Tim Cook has said all these things. He wants service revenue to be digital services content, to be half of Apple’s revenue in the future. They’re driving hard towards that goal. They’re not anywhere near it, but they’re certainly growing towards that role.
Robert: If they cave on this 30% model where there’s tons of pressure, then that’s going to really [inaudible 00:38:06] their strategic ambition. So they’re not going to cave. They’re not going to give up. Honestly, I look at it a little bit like cable television. It’s like, “Hey, this is private infrastructure. They built themselves with their own investment. They took the risk. They did a good job. They have customers who freaking love it and are quite happy with it. You want to sell something inside of their store, you’re going to pay the man. You’re going to pay the 30%. You don’t like that, you don’t want to transact and [inaudible 00:38:27], no problem. You can do it on the browser, do it outside.” That’s the arrangement we’ve got with the Kindle. That’s how we arrive at this totally silly situation. It gets really bad for anything with an in-app purchase. Let me talk a little bit about games because this is really…
Jim: Let’s do a formal pivot now. I [inaudible 00:38:42]. Let’s talk about Epic versus Apple because you know a lot about this.
Robert: The game industry is the backbone of all mobile app stores. This is a key thing to understand, is that half the transactions or more are games. Most of the revenue generating content is games. The games’ industry by the way, is a very big business. Globally, it’s about $130 billion. Sometimes it’s estimated at $150 billion. Puts it on the scale of approximately the size of television so it’s a gigantic industry. Unlike television, it’s not ad supported. There is advertising, but it’s not that big of a driver. It’s mostly consumer payments. Now the transition in the game industry in dematerialization is important to pay attention to. In many ways, it’s a forerunner of what happened to all the other media businesses. So go back to the 1990s with the PlayStation and the X-Box and so forth. In those days you bought a shiny disc.
Jim: Or a cartridge.
Robert: Or a cartridge, if it was… exactly. Or an Nintendo.
Robert: In order to manufacture those cartridges, you had to go through the company that made the console. So they sold the console’s basically at a loss. The idea was, is that, “We’re going to go get this beachhead among users, but we’re going to keep the cost of the hardware low. We’re going to subsidize that by taxing the content and the path fee.” Which is what they called it then. If you wanted to make a Sony PlayStation game, Sony had the manufacturer your shiny discs and they took a 25% cut for that. So here’s your predecessor, by the way, to the app store 30% cut. It was a 25% take. You, as publishers still had to get the thing in stores, you still had to sell it through a store. So there was additional people taking a cut, but the manufacturer of the device took a path fee if you wanted to make compatible software with their device.
Robert: That was the days of selling a shiny disc. I write about this quite a lot. The point basically is that with dematerialization with the vaporized economy, you don’t need the disc anymore. You’re just buying the content. You can buy the content unbundled from the disc. And that’s a gigantic transformation. And it wreaked havoc with the games platforms companies, and it wreaked havoc with the Japanese consumer electronics companies. In the early two thousands, from about… In Japan, in 1998, 99. And then in the rest of the world, starting in 99, 2000, you were able to download a game or stream a game or somehow play a game in a rudimentary browser on a mobile phone. But this is tiny, tiny stuff. It took years and years for it to get legit and phones weren’t very good. But with the iPhone, you had a full color screen, eventually you can render relatively good 3D so you can do a pretty good game experience on a phone.
Robert: That whole interval, it took 10 years. And all of a sudden the mobile phone became the number one place for people to buy games and play games. I can’t underscore how important this transition is. The computer game business starts with stuff like television at home in the 1970s. It was all about the computer and it was all about the TV. And then gradually the game console got better and better, and they became the dominant player. They could render your really beautiful graphics but the Apple iPhone and the Android phones caught up in just a few years. It only took about five years for them to catch up. And then of course just like a camera, if they say the best camera is the one you have in your pocket, the same thing is true with the game console. The best game console’s the one that you have no matter where you are.
Robert: I had predicted this a long time ago, because I was on the board of the game developer conference, which is the biggest gathering of game developers. And as early as 2000, I was saying to them, “Mobile games is going to be huge. We need to get on top of this.” And they were like, “You deal with it.” So I created the mobile games… developed version of the game developer conference in 2001 and ran that for about seven or eight years. And it grew and grew and grew. Today, mobile games is the largest and fastest growing segment, by far, of the games industry. And mobile games outsells PC games, it outsells console games. It’s more profitable. It has way more users. It has way more engagement for all the reasons you can imagine. It makes perfect sense.
Robert: A company like Epic is a major player. In fact, they’re a platform for games. They’re a major player in this space, but they are bristling at this 30% tax. Now I don’t think the issue is the 30% tax on the initial download of the app. It’s in-app purchases. What’s occurred in the game business with mobile is that mobile users want to try the game before they pay. They don’t want to just download some crappy game and find out, I spent six bucks paying for a game that I don’t like very much. So with mobile, in-app purchase was developed in the early 2010s. It became possible to basically play for a while and then you decide as a consumer when to pay and that’s a reversal of the business model. The old business model of games was that you bought a disc at retail and shrink wrap.
Robert: Once you broke the seal, you couldn’t return it. It’s just like a movie ticket. Once your butt’s in the seat, you can’t go to the front box office and ask for your money back. So if you don’t like it, tough luck loser, buy another game for 50 bucks. But with mobile, we were able to reverse that business model so that the users decide when to pay. What’s really interesting is with a game like Candy Crush, something like 98% of the people who play that game, millions of people play it around the world, but 98% don’t pay. They pay for play for free. The 2% that pay, they end up paying for the other 98% who actually are playing for free. This has reversed the economics of games. It’s changed the way we design games. It’s changed the way we market the games. It’s totally transformed the game business.
Robert: One of the leading companies in this is Epic and they’re going, “Hang on, we did all this innovation. We’re not really dependent on Apple for it because we do this across all platforms. And we’ve developed a rich and fertile ecosystem of in-app purchases or in-game purchases. Why the heck should Apple get 30% of that?” It’s a very good question, right? The reasonable thing for Apple to do should be take, 30% on the initial download of a game or the initial monetization, and then take 15% thereafter because you want these companies to grow because it’s going to grow their ecosystem and keep their customers happy. Apple won’t do it for all the reasons I said.
Jim: Interesting. Yeah. I did some research this morning because right now they’re in the middle of a hot lawsuit, right? Real hot lawsuit. I found a website that had various intellectual property lawyers predicting the outcome and they seemed uniformly to believe that the judges would pretty much have to find for Apple’s right to keep a 30% fee. As you say, for the things that you buy literally from the app store. However, it was quite mixed decision with probably a small majority pointing to the view that the judge may rule against Apple’s ability to require the use of Apple pay for in-app purchases. That’d be a split decision, which of course, as we know, because business people are smart, they would start moving most of the monetization out of the upfront and into the ongoing, which as you point out, is already happening in a whole bunch of games.
Jim: In fact, a lot of the really biggest ones are essentially free. [Inaudible 00:45:35] is to play, but they’re [inaudible 00:45:36] “Oh, yeah. I can buy a better sword or I can buy…” What’s really creepy to me, you can buy fancy clothes online for your avatars. That’s a gigantic business, right? If we end up with a split decision, where Apple gets to keep its 30%, but loses the right to demand that people use Apple pay for in-app purchases, you’ll see a whole new ecosystem of all, probably with Epic and the lead to enable game developers to essentially mostly circumvent that 30% upfront.
Robert: I am in total agreement with everything you just said, both analyses. I think it’s going to be very hard to find that Apple has done anything wrong. This is the deal that they offered. Everybody signs up for that deal. On the other hand, to require people to use Apple’s particular monetization technique, that you could see the court looking at a [inaudible 00:46:22] because simply, it’s okay to have monopoly in a way, but what’s not okay is to leverage that monopoly to create a new monopoly in another category. That’s where the courts want to intervene. I think that assessment makes a good deal of sense. I think that Epic certainly is prepared. They were prepared to pull out of the store, right? They’re prepared to go in long and you better believe it. Jim, there’s one other thing popping up because you keep throwing these juicy topics at me. I can’t resist going for the bait.
Jim: Go for it. Do it.
Robert: You talked about selling skins inside of games. As you know, there’s been a gigantic frenzy in the past two years, but particularly in the past quarter around NFTs non fungible tokens, right? Non fungible tokens, what are they? They’re similar to cryptocurrency in the sense that they’re built on block chains and they are in effect a token that you can trade like another digital asset, like a cryptocurrency. But typically these are non fungible. In the sense that they’re not like Bitcoin, where each Bitcoin is basically the same thing and you can trade them. It’s like if I lent you $5 and a week later, you give me five singles back instead of a $5 bill, that’s fungible, right? Those dollar bills are fungible. With an NFT, it’s meant to designate something as non fungible, otherwise unique or scarce.
Robert: What they’re doing with the NFTs is reintroducing scarcity and one place where this is going to work very well, it’s already working, and it’s going to be a gigantic business opportunity, is NFTs for in-game purchases. You better believe it. If the Apple ruling comes down the way you just said it, you are going to see this business of selling stuff inside of game worlds. It’s going to explode. It’s going to grow and grow and grow. You might think it’s creepy and weird. I hear ya. But bear in mind, who is the gamer? Who is the person who’s making these purchases? You take a game like Fortnite, okay. Which is [inaudible 00:48:12] big game. It has about 350 million users around the world. And on average, players spend about $80 on in-app purchases. Remember, the old days you’d spent $40 buying a shiny disc. Now they have this sort of unlimited monetization and it’s actually doubling what the average revenue per user is. Obviously, not everybody is spending that. Probably very few relatively speaking. Some people are spending a hell of a lot of money.
Jim: Yeah. Scary number. It’s $1,500. It’s nuts because this is a addiction model, right? Just like in most addiction businesses… Ask any heroin dealer, they’ll tell you, it’s not the weekend chippers where their revenue comes from. It’s good old mom who’s pouring it into her arm all day, every day, right? And beer is also quite interesting. Beer consumption is highly skewed to the top 10% of consumers.
Robert: I spoke to a fellow who is in the skins business because I was super interested in this because obviously it’s… [crosstalk 00:49:04].
Jim: Oh, I love it.
Robert: … dematerialized business. We’re not selling real clothing. We’re selling digital clothing. Digital… [crosstalk 00:49:10].
Jim: I love it. Human race. What the fuck? The apocalypse clock needs to be moved to 12 noon, damn clothes.
Robert: No. I’m very optimistic about this because look, man, everybody’s worried that robots are going to come and take our jobs. Everybody’s worried that we’re going to be driven out of a profession by artificial intelligence. And so the question is, “What do we do with all these extra humans?” But the answer is already sitting there right in front of us. We’re going to create unlimited digital worlds for them to immerse themselves in. And they’re going to buy and sell and create and trade all sorts of digital experiences for each other. Meanwhile, all of our real physical needs will be provided for by robots. I know that sounds nuts and it might take 20 years before that vision transpires. But man, there’s so much momentum right now in this metaverse space and so much support for it, including from investors, including from companies like Epic and including companies like Roblox that are rapidly building out their version of this metaverse, this all encompassing digital world that you can live in. Now, who is…
Robert: … all-encompassing, digital world that you can live in. Now, who is that customer? Who is that person? And this is what you’ve got to bear in mind. For the last 50 years, the United States has been operating under economic principles that were set forth by Milton Friedman and the Chicago School. One very clear consequence of those policies is income inequality, so you have a tiny number of Americans who are getting fabulously wealthy and a large and growing number of Americans who are not gaining anything like that. In some cases they’re actually losing ground.
Jim: Yeah. If you don’t have a high school diploma and male, you’ve lost 40% of your income generating capability since 1975.
Robert: And those folks who are at risk, right, with automation. Those are the jobs that are the most likely to be automated because they’re the most repetitive, predictable, process-based jobs. And so here you have a huge, a growing number of people who get no satisfaction from their work. They work for low wages. The work is not satisfying. It gives them no self-esteem or prestige. And this fellow who developed Skins said to me, “Listen, Rob, my customer, his day job is something like a delivery person or an Uber driver. Or he works at a Kinko’s or a FedEx, or something like that. And he gets no respect.”
Robert: And he used “he” quite deliberately because generally speaking, the gender skews towards men in these digital worlds right now. And he said, “So this is a person who gets zero respect. He doesn’t make enough income to have a girlfriend. He doesn’t have enough income to buy a house. He is not going to get any of the attributes or markers of status in our current society. And what does he do when he gets home? He’s not watching cable TV. He’s playing League of Legends and in League of Legends, he’s a God. And as a God, he has to adorn himself appropriately so that he’s perceived to be a God.”
Robert: And so this person has a limited amount of disposable income, but he’s going to invest it where he gets the social status that he feels he deserves, and it isn’t going to come from the real world. So this is the person who’s not going to buy Chanel. They’re not going to buy Adidas sneakers. They’re not going to dress up in fancy ways. Their house doesn’t look like much. Their furniture is not very fancy. They don’t eat in fancy restaurants. But in the digital domain, they look like gods and they have adorned themselves this way.
Robert: And so if you think about that mentality and assume that there’s going to be a growing number of people who spend a growing amount of time in digital worlds, you can see why I’m excited about NFTs and the sale of digital objects, not just clothing, all sorts of digital objects.
Jim: I’d rather roll out the guillotine and do something about income inequality. Clank, clank, clank, people. It’s coming.
Robert: Yes. So digital games, mobile games are the opiate of the masses.
Jim: Quite exactly? Right. And talk about the metaverse. Of course, this is a classic science fiction trope, right? I’ve been reading science fiction since I was about seven, a long time ago. So ideas like the metaverse have been out there at least that long, and probably most famously recently in the book, and then the movie, both of which are quite excellent by the way, Ready Player One, right, where essentially the whole world has been sucked into this amazingly cool metaverse. Now we’re off track here entirely.
Robert: No. This is the logical extent that we’re going if we take this dematerialization theme all the way out. You look at a world that’s like kind of a messed up real world, but a really rich digital world.
Jim: Exactly. And Epic has put down a marker saying that they hope to build the metaverse. Right? You know, you being a game, business connector kind of strategy dude. What do you see as the race to the metaverse? Who’s ahead? Who’s working on it? Who’s got really interesting unexpected ideas? What’s the metaverse race look like?
Robert: Well, it’s super interesting. So this right now is a super hot space. I think a lot of what happened during the pandemic with work from home and not being able to go to movie theaters or clubs or other kinds of things drove a lot of the interest in this space. So, first of all, the leading companies, of course, are the companies that build online game worlds. These are persistent games. It’s like running a utility, like an electric company. The game is always on. It’s always available.
Jim: War of the Worlds crap.
Robert: Yeah, games like that. And with Sony EverQuest back in the day.
Jim: EverQuest was the only one I ever got into pretty heavily. That and briefly, the Lord of the Rings game. Those two.
Robert: And you know when you run a game like that is that you have to constantly invest in building new quests, new worlds, new domains, new stuff. You’re constantly building it out. And that’s why these companies resist companies like Apple taking their 30% tax on top of all that new stuff, because they’re like, we’re doing all the work here. We’re the ones that are [inaudible 00:54:25]. We’re investing in all this new innovation and new levels and new expansions and so forth. Why should you tax that?
Robert: So the first thing I want to say is that this battle between Epic and Apple is not just about mobile games and what happens on the iPhone. It is absolutely a battle for who controls monetization in the metaverse.
Robert: And the stakes are super high. And like you said, looks like it’s going to break an Apple’s favor. I don’t see why wouldn’t. I haven’t heard an argument why it would. So that presents a significant challenge. It’s not just Epic, although they are certainly a leading candidate and a game like Fortnite is worth noting that you can build your own island and you can build up the five islands, right, with the creator tool, which means that people are building their own little universes. They’re building their own little worlds.
Robert: And so, in other words, you know, you get 350 million people playing that game. Tens of millions of people are being conditioned to the idea, the notion that they can create their own world. Just let that sink in for a second. It’s like millions and millions of people are being taught right now that there’s an easy to use tool that allows you to create your own world. Hey, guess what? That’s what Roblox does. Hey, guess what? That’s what Minecraft does. Well, it turns out there’s more than a thousand of these persistent world games around the world, and they all have millions of users.
Robert: So a huge percentage of the smart, connected people on the planet, or the affluent part of the world, if you will, a huge percentage of them are now being conditioned to this notion that you don’t just spend time playing and having fun in these digital worlds, but you can also create and manipulate and manage a digital world. It’s all really rudimentary right now. It’s early days. I wouldn’t say that this is like a gigantic trend or anything.
Robert: No, it’s early, early, early. But these companies that we just refer to, they are absolutely committed to building out the metaverse as it was as set forth by say, William Gibson back in Burning Chrome or Neuromancer or something. This idea that you jack into this digital world, and there’s all sorts of amazing stuff that can happen and occur. Not just the game, but your social life, your dating life, your school, your education, your business life. You can create a business in this environment and so forth.
Robert: The vision is quite rich. It’s quite fanciful at this stage because none of this stuff exists, but the tools to build it are getting better and better by the day. And Jim, where this gets really nuts is, of course, this intersects with cryptocurrency and digital currency, because that’s going to be the monetary basis for these digital worlds. And it also intersects with digital personalities or synthetic personalities because these worlds will now just be populated by human beings. They will also be populated by algorithmic beings.
Jim: NPCs, right?
Robert: Well, they’re getting richer and richer now, because now with artificial intelligence, those… NPCs were scripted and they didn’t really do much in a game. They were basically just a menu item or a narrative piece that drove the story ahead.
Jim: They’re getting better all the time.
Robert: Now they can make decisions. They can play against you. They can support you. They have agency, these creatures. And they’re getting really good. So again, a thing that has changed in the last couple of years, really swiftly, is the ability to generate in real time, generate convincing life-like models. Where are you going to see this most right now is Vtubers. And these are people who are YouTube stars, but they don’t have themselves on the screen. Instead they had a 3D generated character. Code Miko is the one that’s most famous here in the United States. It’s certainly worth checking out Code Miko because it’s kind of fascinating. It’s like a little bit of a glimpse of the future.
Jim: How do you spell that?
Robert: It’s code C O D E, and then next word, Miko, M I K O. She is a super talented YouTube artist who happens to also be quite capable at 3D animation. And she wears a bodysuit, so her character appears on YouTube, not her. But it’s her voice. And she acts. She does all the motion and the mo-cap suit generates, turns that into instructions for the 3D model. So what you’re looking at is a 3D character. It’s like having a live animated character talking to you. It’s super bizarre, and it’s a fun experience.
Robert: Well, in the not too distant future, if you combine that ability and those mo-cap libraries with something like GPT-3, where you’re able to generate convincing texts. And again, it’s not ready for prime time yet.
Jim: I work with GPT-3. It’s very, very impressive, but four or five will probably be there.
Robert: Okay, sure. So there’s a timeline, right? And yes, all this stuff is terrible, except it’s the most bad it’ll ever be. And it’ll just keep getting a little bit better each year. Our timeline here, by the way, isn’t next year. Our timeline isn’t 2025. Our timeline on this metaverse stuff is probably 2030 or beyond, but that’s really soon. Like that’s not too far off.
Robert: So what I’m envisioning then is a world where people are making, buying, trading, selling, collecting digital items, digital goods. They’re also interacting with digital people, synthetic human beings, synthetic personalities. They’re using digital currencies to do those transactions and to earn money and to pay for things. And all of this is happening inside of a generated 3D world. And as nutty as that sounds, and I know that half the people listening to this are going to be like, “That dude is on crack,” but I’m not.
Robert: I’ve been through these revolutions now three or four times in my career. You know, there was a time where I was telling everyone, “Look, mobile is going to become the most important thing.” That was 1999. And the TV industry where I was working at the time, they were like, “You are out of your mind. You’re certifiable. We’re not going to watch a video on a phone. That’s crazy. Two different things.”
Robert: Well, it only takes 10 or 15 years for those crazy ideas to move from implausible to plausible. And then from plausible to practical. And then from practical to inevitable. Think about robot vehicles, just to take a completely different example in this theme. Back in 2000, robot vehicles were a joke. It was a dark experiment and it failed.
Jim: They were hilarious to watch. They’d fall over, run into trees, couldn’t back up.
Robert: And then they worked. All of a sudden, it was like, “Whoa.” Sebastian Thrun and his team actually figured out a way to get a robot to do it. They learned to learn. And then suddenly an entirely new industry was born of robotic vehicles. And though we’re years away from fully autonomous vehicles, I think everybody now agrees that the idea has gone from absurd, preposterous, to quite believable, quite plausible. And it’s going to be inevitable probably in the next 10 years. So that timeframe is only 20 years. It’s not that long of a timeframe, Jim.
Jim: Yeah. It’s amazing. We’ve done quite a few shows on self-driving cars. Most recently we had Jim Hackett on, CEO of Ford, who was brought into Ford to drive their electric car and their self-driving car thing. And he’s a very sensible Midwestern engineer. Right. He was a down to earth dude, right?
Robert: `Yeah. No metaverse guy there, but he’s talking about real stuff that’s happening, and [inaudible 01:00:49] too.
Jim: Yeah. And he’s conservative. So he says 2030, right, level five, true autonomous cars.
Robert: But that’s nothing Jim. Nine years away. Like 2030 sounds like it’s way the heck out there. It’s only nine years away, and now think about what comes with that. Right? So if you buy that 10 year timeline, I do, then you have to think about smart cities because you can’t have smart cars without smart cities. Right. So smart city means that you’re going to have an autonomous city where every street lamp is now tracking traffic, and emissions, and traffic patterns, sound patterns, and so forth. And probably there’s some central switching system that’s telling all these autonomous vehicles where to go, and how to drive, and where to park, where to drop off.
Robert: You start to see the city as a computer. You know, the entire city surface will be a computing interface. I find that’s a fascinating vision. And by the way, that’s the flip side of the metaverse, right? So now what we’re talking about is digital twins. We’re right on the doorstep, so let’s walk through that threshold and go for it.
Jim: Go for it. Do it. Tell us about that, because you described the theory, you can see. [Inaudible 01:01:52].
Robert: So now, imagine if you will, that I’m doing a hand waving gesture here that nobody who’s listening to this can see, but I’m holding up both hands. And on the one hand, you’ve got this vision for the metaverse, which is a very, very richly conceived, well-designed, maybe very creatively designed 3D universe in which you can do everything that you do in the real world. And a lot of other stuff, because there’s all kinds of like synthetic characters and invented things. Okay. So that’s the metaverse.
Jim: Sexual perversions that gravity would not allow you to do.
Robert: Dude. It’s like already happening. Yeah, it’s off the hook. So that’s the metaverse. That’s a fully digital or fully dematerialized world. And on the other hand, you’ve got the real world, okay? The world that we live in and move around in every single day. But gradually that’s also getting wired up, and it’s getting wired up because the cost of sensors, just like all chips, the cost keeps going down, and as it goes down, you can deploy more.
Robert: And so you start to see sensor networks. Instead of hundreds of sensors now, that they’re deploying tens of thousands, ultimately millions. And so, the people that are focused on the sensor networks are talking about trillions and trillions of sensors, every three feet on every freeway and roadway. You know, every corner, every streetlight. Everything will be loaded with sensors. And by the way, your phone is like starting. Your phone has like 20 sensors built into it already.
Robert: So you’re going to have sensors all around you in the environment. And what are those sensors doing? They’re tracking everything that’s moving, everything that’s happening, every single thing they can sense. They’re building a digital model of the real world. At millimeter levels of precision, they’re building a digital model. We call this a digital twin, and a digital twin resides somewhere between these two visions. This idea of the metaverse, a fully digitized world, and this idea of the fully networked or fully wired, sensored real world in the middle as a digital twin.
Robert: What’s a digital twin? Well, the concept starts naturally in space because it took place in places where it was not easy to get equipment and it was not easy to get a repair person out in space. So NASA began with idea that if we can manage anything in space, a spacecraft, robotic spacecraft, with a digital twin just using sensor data, telemetry, that’s coming off of the spacecraft, we can manage the digital twin and thereby manage this thing on the ground. And effectively that’s what they’re doing with the robots on Mars as well. So this principle holds up.
Robert: It also held up for say know, CERN, the Large Hadron Collider, right? So when you have a piece of equipment that big, that covers kilometers, and you’re talking about colliding particles at super high speeds something could go wrong, and it could be like dramatic, the negative consequences. So what they tend to do is run a lot of simulations on a digital twin, a Large Hadron Collider, so that they have a pretty good idea of what to anticipate when they run the real experiments in the real world.
Robert: And then gradually companies that sell heavy equipment like General Electric, Siemens. These companies began to develop digital twins for large industrial installations. So think of like a gas dynamo.
Jim: Exactly, gas turbine. Famously. They’ve got it really cool digital twin.
Robert: Or something that’s hard to reach when it’s in use like a jet engine on a jet aircraft. Okay? So today, when an airline wants engines, they’re ordering aircraft from Boeing, they don’t buy the engines. They lease the engines from a company like General Electric. And what General Electric is selling them is basically engines on demand or jet power on demand. It’s exactly the same deal that you strike with an ISP where they’re giving you a five nine guarantee of uptime. Those jet engines are loaded with sensors. They have a very accurate digital twin. And something I learned I didn’t know, the folks at GE told me. Based on usage and atmosphere conditions every jet engine develops its own profile, becomes unique with use over time. And the sensors are what helped them develop that unique digital model for that engine.
Robert: Of course, there’s a way for that data to be sent ahead. So if you have a flight that’s going from Los Angeles, say, to Singapore, the ground crew in Singapore can see that parts on engine number three are starting to wear out and they’re going to need to be replaced. So when that jet arrives at Singapore, there’s a crew on the ground ready to replace those worn out parts. This is predictive maintenance. And it’s what allows GE to guarantee uptime the same way your ISP guarantees uptime.
Robert: So that idea of a digital twin has taken hold in the industrial world. But as you can see from the comments about the metaverse, it’s also very quickly capturing the imagination of a very imaginative group of people, young consumers. I think these things are going to merge in the future.
Jim: Unfortunately, we’ve been digging in and going in so many different ways, we don’t have as much time as I’d like. So I’m going to skip over some of the interesting stories, like the story of fonts and type setting, which was really fascinating. I really enjoyed that. I did some research this morning to see whatever actually did happen to Morgenthaler, and they turned out, they got acquired in 2007. The company that bought them got bought by private equity. He went to business purgatory in 2019. So it didn’t end quite as nicely.
Robert: It’s sad. The talent stories are always [inaudible 01:06:56].
Jim: There you go. Well, anyway, let’s switch from here. The most amazing, this idea of the digital twin and the metaverse co- evolving, which I’m going to have to think about a little bit. This has been great, to probably still the most fucked-up industry in the world, TV. You know, my wife and I, I would say at least twice a month, we’ll say, “Where’s the genius that’s going to make sense out of the TV industry? This is the most backwards, fucked-up, aggravating, trifling.” You know, it makes the dick-waving competition between Cook and Bezos look like nothing. Why is the content we want spread over all these idiotic services, each with a different password, and yada yada yada.
Jim: It’s like the worst mess. And you take us through quite fascinating evolutionary context on how it was even more fucked-up in days of yore. And these are just the inevitable playing outs of sort of game theoretics of people who have these choke holds not wanting to give them up. And they’re transformed a bit, but not nearly what you would have if you started with a blank piece of paper.
Jim: And before we go there, I did do a little research this morning to see how much a transformation has occurred. Somewhat to my surprise, as of late last year only 25% of video watching was streaming. I would’ve thought it was way more than that, but still that’s a pretty good-sized number.
Robert: Yeah, that’s a relatively big number.
Jim: So that was kind of interesting. My wife and I, I mean literally a tree has grown in front of our satellite dish and we keep meaning to cut it down. It works okay in the winter. There’s no leaves on it. But in the summer, even in the spring, it doesn’t work. So we literally haven’t watched our satellite TV in like two months. Right. And haven’t missed it at all. We watch streaming about two out of every three nights, an hour or two.
Robert: So you’re a good reference point, right? There’s a lot of inertia here. Most people have a TV habit. And if you go by generation, the baby boomers and whatever came after, gen X-ers, we grew up with cable TV, right? That was the big innovation. That was the green field back when we were kids. In the seventies and eighties, that was where you could make your fortune as a mogul was in cable TV.
Robert: What’s cable TV? How is it different from broadcasting, which was the previous opportunity, right? Well, when you make content, particularly video content that’s expensive, you have a couple of different problems. One is how do you create the thing and how you finance that. Right? And that’s a creative management process that the movie studios are actually quite good at. They’ve been doing it for more than a hundred years. And they’re very, very effective.
Robert: When you think about movie studio, which is kind of an outdated term because movies aren’t really that central anymore, really you want to think of them as the investment banks for creative content. And they’re extraordinarily good at this, and one of the reasons they’re good at is they don’t use their own money. So they’re just like banks in that respect. Okay? So that’s the creation.
Robert: Then there’s the distribution, which is really about getting the content in front of eyeballs. So back in the early days of motion pictures there was a big battle. Can you be a movie studio and also own your own theaters? And the government got in the middle of that and said, “No, you can’t,” and broke them apart. Thomas Edison had patents and he was trying to control the entire film industry outright, and then he was thwarted. But the reason the movie industry is in California is because he was in the East Coast and they thought it was too far away for him to come fight them with patents and so forth. That’s why Hollywood exists anyway.
Jim: I thought it was mostly the weather. They wouldn’t have to pay for lighting, and they could shoot outside.
Robert: Beautiful sunlight. And yeah, you can do cowboy movies cheap. You’re just drive out 50 miles into the desert. Okay? So that’s kind of stuff that baked in from the very beginning of this industry though, this struggle between the distributors and the content creators, the studios that create it.
Robert: And then television came along. It was viewed as a threat to movies, but it was also viewed as an opportunity for the studios. So some studios diversified into TV. Some didn’t. Gradually there’s mergers and acquisitions and so forth that happened. And these TV networks, quite ruthless if you read about people like [Paley 00:01:10:43]. I mean, it’s fascinating how the TV networks were built. They exercised full control over a national audience of unprecedented size and scale, and they were able to monetize that with national advertising, which was never previously possible. So they really created a gigantic industry.
Robert: The next big industry was cable. And cable, the distributors had tremendous power. If you crossed the cable distributor, the cable operator, they would just take your channel off the air. Many times when I was at MTV, we had this battle with TCI, which was John Malone’s cable company. They didn’t like MTV because we had racy content for the time. It was a little bit provocative. Sometimes they would take it off, and we would always fly a band into the town where they took it off and hold a big free concert with a private cable company. It was called I Want My MTV. And lo and behold, we’d be back on the air the next week because they couldn’t withstand the withering criticism from the local population that wanted their MTV. So this struggle between distribution and creators has always been a matter.
Robert: There’s always new creators coming in. There’s always a new forms of distribution that are dominated. We spent some time earlier talking about Apple and the mobile ecosystem, which is just another version of the same old struggle. Okay? We also talked about bundling and unbundling as a core business model for anything digital media, any kind of content. Well, when it comes to today’s streaming media services, all of these old habits, they’re a hundred years old at this point, they all come together because we’re talking about new kinds of bundles and we’re trying to control an audience and control eyeballs and thereby control the content companies.
Robert: And so when you say that the big media giants and the beginners don’t play nicely together, this comes to the fore when it comes to streaming video. Nobody’s playing nice together, and everybody’s trying to carve up whatever domain they can. The whole reason why Amazon bought MGM. It’s not because MGM has this great library. Candidly, it’s an okay library. It has James Bond but comes with all kinds of rights control issues with the Broccoli family that controls that. So it’s not the free and clear thing that they got the right to reinvent James Bond. And all the rest of the stuff in the MGM library is kind of tired. It’s stuff like Moonstruck Silence of the Lambs and stuff. How many times are you going to watch those movies?
Robert: But what Amazon did was they took a key piece off of the table, right? They took a key studio off the table, one of the five big classic movie studios is now part of Amazon. By the way, these studios have been bought and sold by many other conglomerates.
Jim: Yeah. Sony owns a couple of them, don’t they?
Robert: Sony own Columbia and Tri-Star. And Matsushita owned Universal before it was NBC universal. So these have been pieces on a chess board that have been bought and sold for 30 or 40 years. So that itself is not a new thing.
Robert: But what Amazon did is by buying MGM, they simply removed that gigantic library of some 4,000 movies and 17,000 TV shows. They removed it from all the other streaming companies. So what Amazon did in one shot, in an $8 billion transaction, which for them is not that big. It’s not as big as a Whole Foods transaction. They did two important things. One is they got a nice piece of content that they can stock their service up with all this content now. They have a movie studio. So now they’re going to be great at producing. And they haven’t been that great on their own. They have not made that many hits, so they could benefit from having a movie studio and the 500 people, or whatever it is, at MGM that produces films and particularly very successful series for streaming.
Robert: But more importantly, they knee-capped their competitors. Who are they kneecapping? Well, okay. You’ve got Google that owns YouTube. They’re not harming them. They dominate in user generated content. Let’s set them aside. They’re a little bit different because YouTube is a kind of a different creature. Netflix. Well, Netflix has to spend a heroic amount, more than $10 billion a year, 10 billion, creating content for the whole world. That’s a really amazing achievement we should take a second to consider.
Robert: Then there’s Disney. Disney Plus as been gaining on Netflix. It’s the extraordinary success story of the last two years in streaming media. They’ve grown so quickly. They just launched it like two years ago, and now it’s number two to Netflix and it’s growing really fast. They’re going to catch up to Netflix. And then there’s Amazon. Amazon rolls video in as part of their prime service. You pay a hundred bucks a year to subscribe to free shipping from Amazon and you get video for free and a bunch of other stuff as well. So this is a very weird bundle, and it’s troubling to the content companies because they clearly don’t value content. They’re just throwing it away for free. Right? It’s a troubling thing. Bezos has said that for every person who’s watching str-
Robert: Bezos has said that for every person who’s watching streaming video, he can sell them more razors and more toilet paper. He’s very much seeing this as a commerce engine. And in a way, it’s content without advertising, so it’s money he would have had to have spent as a retailer on advertising that he doesn’t need to spend. He can spend it on content. Well, who they’re going after is everybody else. Those companies are going to be fine. They’re going to compete fiercely. And what we know is that most consumers are willing to spend for three OTT streaming services, but wouldn’t really love spending for four. I don’t have Disney+ just because I don’t think I need it. I’m not going to watch it.
Robert: Apple is an outlier because they’ve got Apple+, which it’s sort of a half-hearted attempt. They’re doing decent program, but it’s very thin. Apple should buy a movie studio if they want us in the space. But now let’s look at everybody else. ViacomCBS. ViacomCBS, they’re heavily dependent on advertising. They’re heavily dependent on broadcast TV. They’re heavily dependent on cable subscription. Where are they going to go? What’s their future? What lies in the future for ViacomCBS? They’re tiny relative to the big giants we just spoke about.
Robert: Then there’s Time Warner just dumped out of AT&T for half the price that AT&T spent to buy it three years ago, merging with Discovery, which has been a powerhouse managed by probably the most brilliant guy in the whole cable TV business, David Zaslav. And as you mentioned earlier, John Malone is involved in that structure, so these guys look like they’ve got momentum. But bear in mind, they’re a distant fifth or sixth in this foot race at this point for signing up OTT subscribers. And Time Warner has to come up with a way to persuade you to add one more OTT service. How are they going to do that?
Robert: And then there’s all sorts of other companies. Lionsgate, Sony, as we talked about, Sony owns the two movie studios. NBCUniversal, which actually has done pretty well, relatively speaking under Comcast, but the unaffiliated independent studios and the remaining movie studios that don’t have strong OTT direct-to-consumer distribution, they’re going to get consolidated and there’s going to be some sort of roll up play, and it’s going to be very interesting to see how the Justice Department deals with this. And the Justice Department, I don’t think they’re going to have an issue with Amazon buying MGM because they’re not dominant in any way in this space.
Robert: But if, let’s say Apple wanted to come in, I would love to see Apple buy Sony. It’s never going to happen because they hate each other, but I love it because I love Sony, I love their collection. They have an amazing library. It’s way better than the MGM library. It’s richer. As you pointed out, it’s two studios, it’s Columbia and TriStar. They have a phenomenal TV library and it’s stuck inside of Sony. And it’s like, “Well, Sony is a dying electronics company with a very successful game business. How does a movie studio fit in there? Shouldn’t they spin it out?”
Robert: Sony is worth about $125 billion now, so Apple could buy them without changing their facial expression, and it would not even be a blip on the horizon. Or for the $125 billion, Apple could also buy Epic and some other game companies, and Apple could also buy ViacomCBS and probably Univision or some other huge media companies as well, and they’d probably have some billions of dollars left over. So if you look at it that way you go, “Wow, a company like Apple could really transform the media landscape if they wanted to get into acquisition mode.”
Robert: The wild card scenario here, Jim, is antitrust. And so, the DOJ now has antitrust investigations underway against Apple, Amazon, Google, and Facebook. And as everyone knows from the Microsoft saga, when you’re under investigation, you really don’t want to be pushing the envelope too much. You don’t want to add more things for them to investigate. That makes some really odd timing for Amazon to co-opt your Echo device and turn it into part of a mesh network.
Robert: I don’t know if you noticed that weird land grab that Amazon is doing this week. Without your consent or permission, they’re simply going to convert some portion of the bandwidth that goes to your Amazon Echo device and your Ring doorbell into a mesh network that could be shared by other Amazon Echo and Alexa devices. I find this very strange.
Jim: Did not know about this. Fortunately, I disconnected my Alexa a long time ago.
Robert: Yeah, but it’s the device. You really want to get into the control panel. By the way, not an easy thing to do. You’ve got to find out, “How do I get to these permissions?”
Jim: Yeah. Mine’s turned off in a closet unplugged. It’s not causing a problem, right?
Robert: So what’s going to happen after June 9 is automatically, those devices that are still connected, they’re going to be opted into a mesh network that’s controlled by Amazon. It’s going to make Amazon a giant bandwidth player overnight.
Jim: Literally when you say a mesh network, they’re going to be talking to each other?
Robert: That’s the idea. And somehow borrowing bandwidth from each other. So if you have a Ring doorbell and it doesn’t have great connectivity because of the way your Wi-Fi is configured, it can borrow a little bit of connectivity from a neighbor. And I’m no expert in this, trust me. And by the way, it’s not easy to opt out. You’ve got to do some work to opt out and you’ve got to do it by June 9.
Jim: Wow. This is interestingly weird. It’s amazing.
Robert: Super aggressive, right? For a company that’s under investigation right now, you would say, “Do you guys have to do this at this moment in time?” It’s fascinating.
Jim: Before we wrap up TV, because there’s one more topic I want to get to before we get out of time, I call this one the dog that doesn’t bark. A product that I envisioned in the late 80s, we were approached in the early 90s when I was at Thomson. I was the chief technology officer at Thomson and I had a thing called Thomson Labs. And we analyzed it and concluded that it would not work, so we saved Thomson the $40 million buy-in it would have cost to be part of this interactive TV project.
Jim: Why didn’t interactive TV ever happen? It would seem like, “Wait a minute. They’re in the advertising business. Why the hell can’t they go to press the button and buy the thing?” In 1988, that seemed to me like the obvious huge business just sitting there waiting to happen. And yet, here it is, 2021, and we still don’t have interactive TV. Why not?
Robert: Yeah. It’s a great question. So the main thing here is we have a TV habit and it’s a very good and well-established habit. Most people’s favorite hobby is watching television. We don’t think of it that way, but if you look at the hours of the day that we spend doing non-businessy things or non-social things, watching television is a pretty dominant one. And our habit is simple. We press play and we sit there.
Jim: And drool a little bit.
Robert: That’s it. Exactly. So what we don’t do is click a lot of buttons, and a lot of people have observed that. And they said, “Well, that’s really weird.” Because on the one hand, you’ve got all this interactive stuff like video games, even sometimes on the same set, the same screen, where you’re clicking a lot. You’re interacting a lot.
Jim: Yeah. These little twitchy first-person shooters, that’s all you do.
Robert: Yeah. But also, Instagram or TikTok is that you’re clicking a lot on these services. You might not think about it, but you’re touching. You’re interacting. But then you go over to TV, where we spend an enormous amount of hours, more than that other stuff, and you’re clicking once per hour basically. You’re really not clicking very often. And that’s a very odd distribution pattern, and everyone’s assumption was that there ought to be a way to break that pattern. It turns out there isn’t. I know a lot about this topic. I spent years in interactive TV. I built the only profitable interactive TV division in any movie studio. I did it at Sony. I made a ton of money for them, but it was a flash in the pan.
Robert: And I saw very quickly that mobile was going to overtake it. Mobile is a device where we do have a habit. Our habit is to play with the phone and touch it a lot, and interact and click and multitask and do all those things. So on mobile, you can touch, and touch is a part of it. And what I would urge you to consider is this new thing that’s emerged, Twitch, which is a weird hybrid between TV. It isn’t really television because it’s just somebody streaming, a live streamer, but it is video and it’s streaming in a linear pattern, so that’s kind of like TV. And yet, it’s highly interactive with chat and discussions and things to click on. And so here we have some kind of weird hybrid, but it sure isn’t what people expected when we started out with interactive TV.
Robert: And just the last thought here on that note, back in the early 90s when I was at MTV, CableLabs, which is the R&D group for all of the cable consortiums, CableLabs put forth a business plan for every interactive service that you could deliver through television. This is 1993 when things like CompuServe and AOL were still pretty tiny. Dial-up access, there was no worldwide web in wide use at that point. It existed, but it was tiny. Browsers were barely known.
Jim: That was about the time we looked at one of these interactive cable deals, and we had an invitation to buy into it and chose not to.
Robert: I still have this playbook from CableLabs, which I got when I was an executive at MTV, and I thought it was absolutely brilliant. And in my mind, as soon as I read that, I’m like, “I want to be doing this the rest of my career. I don’t want to be in the linear TV business.” Well, cable operators, long story short, they did not act on this. And it spelled out every single business opportunity that you could deliver over a broadband network to a screen, including auctions and eBays and dating sites, every type of entertainment on demand. Cooking, religious services, it just goes on and on and on, and it broke down like, “What would the thing be? How would you interact with it? How would you find it? And how would you charge for it? How would you make a business out of it?”
Robert: The cable operators could have dominated the space. They had the opportunity, they had the pipe, they had the connection in the home, they had the billing system with the customer, they had all of the pieces they needed, they just chose not to do it. They made a gigantic blunder and now they’re being driven into obsolescence, and frankly, they deserve it.
Jim: Right. Because as you know, cable companies were built mostly out of guys who were bought out from their little sleazy local operations who were mostly in the business of bribing public utilities commissions, and the characters in these cable companies. I spent two days at Comcast in Philadelphia once, and I go, “Holy moly.” It reminded me nothing more of like than a convention of mafiosos. A cross between mafiosos and aluminum siding salesman convention in Vegas. Though Comcast got a reputation for being smart as cable goes, Roberts is obviously a really good businessman.
Robert: Very smart. And listen, their acquisition of NBCUniversal has been very successful. They’re the only teleco that has ever acquired a content company and managed it successfully. That’s an incredible achievement and it should be a business school case study. So yeah, Comcast, very smart operator.
Jim: But they have a bunch of sleazy people working for them though, I will point out. Now, before we go, I’ve just got some research I did this morning on the relative size of these players, because I frankly didn’t know. It turns out in 2020, YouTube did $20 billion worth of revenue. Way more than I would have guessed. Netflix, $25 billion, probably a little more than I would have guessed. And then probably about what I would have guessed, Disney Media Networks, $28 billion. So they’re all about the same size, which is kind of interesting, even though they play in completely different domains, different fields, and different business models.
Jim: Compare and contrast that with the business that you would definitely like to own until you don’t, which is Facebook, at $85 billion. Now, keep in mind, Netflix and Disney are paying out a shitload of money, you pointed out $10 billion a year, for Netflix to build content. Facebook doesn’t pay a penny. They got the fools. The serfs are working for them.
Robert: Right. And they’re doing advertising, so they’re actually selling the audience.
Jim: You’re not the customer, you’re the product. Remember that when you’re on any product that doesn’t charge you. You are the product, not the customer.
Robert: Apple kneecapped Facebook’s ability to monetize based on your Facebook profile recently with their latest OS upgrade where you can opt out of any kind of tracking.
Jim: Well, that’s on the non-Facebook apps, that cross tracking, which is part of their … You have a very interesting, very insightful chapter in the book about the integration of information from multiple domains, which unfortunately we’re not going to have time to talk about, but strongly recommend people that are interested in this topic to read the book because he does a very good analysis of that huge thing that happened when Facebook pulled their data and Experian data together and produced the everywhere data, I believe you called it, right?
Robert: The everywhere graph, yeah.
Jim: Yeah, yeah. The everywhere graph. Anyway, the last topic, I have pages of this stuff.
Robert: I love it, Jim. Thanks. Thanks for being prepared, man. That’s great.
Jim: That’s the hallmark of The Jim Rutt Show. I put 10 hours of preparation in for a typical podcast. The last one from the book, and this is the second of your four-part model, and this is the one that is really critical that anyone who wants to think about these domains really got to get their heads around. You have another four-parter of switchboards, markets, platforms, and ecosystems. And maybe if you could take the audience through that a little bit and what you mean by each of those, and how this basically represents a strategy space for people to operate in the modern world.
Robert: Well, let me begin by saying that often people use these terms interchangeably. I run a small consulting business, and one of the things I have to do often with my clients is disabuse them of the notion that an ecosystem is the same thing as a platform. It’s not. It’s extremely different. They’re distinct ideas. And so Jim, what I argue in the book is that all of these empires that we’ve been talking about, all these digital empires, are all built on the telecommunications network. And the key to controlling the telecommunications network is not the terminal device. It’s not about the phone. It’s about the switchboard that connects one person with whatever they’re trying to reach.
Robert: And back in the old days, the way AT&T was able to roll up all those independent phone operators across the country and build the first national network was that they wouldn’t allow those networks to connect to their network. They wouldn’t allow the switch for long distance calls. And so, the value of a local telephone network wasn’t really that great until you could call your cousin in Idaho or your aunt in Pittsburgh or whatever. And so, you had the buy-in and they were able to absorb. So this is a key control point in telecom is the switchboard. And the switchboard does is it efficiently connects people with whatever it is they’re seeking.
Robert: Okay. So now imagine if you have a switchboard and you’re able to build some sort of monetization into that. So it’s not just connecting you to what you want, but I can take a vig, a referral fee, a commission, some kind of income on that. And the person on the other side, let’s say they’re a purveyor of information, they’re willing to pay me that. Okay. So now I can now arbitrate audience and drive audience to different offers on my network. So [inaudible 01:28:52] as a switchboard, now suddenly I become a marketplace. And I call these switchboard markets because that’s really at the core of every business model on the internet. Think about eBay.
Robert: The third part is the platform. The third phase is the platform. So now if you’ve got customers on the one hand who are seeking information, think about going to Google. You’re going to Google, Google’s a switchboard for information products. Facebook’s a switchboard for people, so is LinkedIn. eBay is a switchboard for collectible items. Amazon’s a switchboard that connects people with the stuff they want to buy. So there’s all kinds of different switchboards, but they’re all basically efficient ways of routing people to whatever it is they seek, and they all have search and discovery at the core of them.
Robert: But now we add in on top of the monetization, we add in tools that allow developers, third parties to come in and build new experiences. This is a platform. If you’ve got the tools, now you’ve got a whole creative element that you and your own team, no matter how creative you are or how big your company is, you’re not more clever than the whole internet. So this is how these companies have been able to co-opt all the innovation that used to be outside the walled garden. The original diversity of the web. Think back to 1998, all those crazy ideas. Now all this stuff is suddenly an app on your phone inside of Apple’s ecosystem or on top of the Android platform, if you will.
Robert: And that is because these companies have aggregated demand, they’ve gotten monetization with the marketplace, and now they’ve built a set of tools that just makes it faster and easier for developers to reach that audience. You don’t have to build all that underlying stuff, you’re taking advantage of what’s baked into the platform. All the communication tools, all the billing infrastructure, the account management, the profiles, all that stuff is provided by the platform. It’s a lot faster for a developer to gain audience quickly on top of a platform, and that’s why developers come in.
Robert: And if you’re really smart, you can manage that developer ecosystem. And the key thing is to make sure developers are profitable, that they have a way to make money, but also create great experiences that you could never envision yourself as a platform owner. And every one of the companies we’ve talked about has a lively and very active developer program. Apple’s Worldwide Developer Conference is coming up. Facebook is gung-ho about developers. So is Google. These companies pour enormous research, more than anyone, Microsoft, these companies are extremely sensitive to the health and wellbeing of their developer community.
Robert: Okay, so now we’ve got a switchboard with monetization, that makes it a marketplace. On top of the marketplace, we’ve now built a platform where third parties can use tools to build new experiences and drive all that stuff even further. What’s an ecosystem? Well, eventually when your platform gets cluttered with too many things, you need new ways to search and discover, you need new ways to recommend, you need marketing strategies, you need all sorts of business advice about how to operate your app business inside of this.
Robert: And when your developers are selling to each other, that is the ecosystem. That’s the richest of the business models. That is where Apple in its full fruition is today. There’s a huge ecosystem. I’d say Facebook as well. All those people that teach you how to manage your storefront on Amazon, that’s part of the ecosystem there. Anyone who’s teaching about search engine optimization for Google, that’s part of the ecosystem of Google. And so what you have then is a rich economy, it’s a very intertwined economy, and the term ecosystem is overused and misunderstood. We have to think about a real ecosystem.
Robert: Think of a bay or an estuary. There are different life cycles for different creatures inside of the ecosystem. And if one kind of organism takes over, like an algae bloom happens, it starts to snuff out the other kinds of life, and that is bad for the ecosystem. And when it comes to a battle like Epic versus Apple, what we’re looking at is the ecosystem is trying to clean itself up where one dominant life form is kind of an algae bloom, and it’s taking too much of the nutrients out of the ecosystem for the other players to thrive. And that is the complaint against Apple right now.
Robert: But you could say the same about Amazon. Amazon is cluttered with all these fake goods and all these weird kind of creepy marketing techniques. I don’t know if you’ve bought anything on Amazon Marketplace, but quite often you’ll buy stuff that isn’t what you ordered, and it’s only $5, and why send it back? It’s not even worth it. So a lot of creepy stuff going on there. All those companies that used to do clickbait farms on Google, where they’re harvesting Google search queries and turning them into money.
Robert: These are all bad, unhealthy outgrowths in the ecosystem, and they need to be culled from time to time. So when we think about this, companies want to start with an ecosystem. Some of my clients, they’re like, “We need to build a thriving ecosystem.” I’m like, “First of all, show me where you’ve got a switchboard. Secondly, show me how you can monetize that in a marketplace. Third, where’s your developer program and your tools? If you haven’t got that, you don’t have a platform. If you’re not a platform, forget about it. You don’t have an ecosystem.”
Jim: Yep. Beautiful. A lovely model. And you referenced a couple times that actually Microsoft may have played this better than anybody. They’ve got a gigantic ecosystem of third parties that work with their stuff, integrators that make other piles of shit work in corporate America, and training of the people. I was working with Microsoft way back yonder with the introduction of Visual Basic. And they have always been amazingly solicitous of anybody that helps support the developer, because Gates himself is a developer at heart, and above and beyond all other companies. One of the reasons that Microsoft went so far with so little frankly, was the fact that they prioritized the developers and then the ecosystems that arose around those things.
Robert: I agree. And let’s point out that Satya Nadella is probably one of the best CEOs operating right now of anybody in the world. He doesn’t get as much praise or visibility as some of the other CEOs. He’s done an unbelievable job because he’s migrated Microsoft off of its core products, operating systems, and the Office Suite, he’s made that stuff basically free. And he’s migrated them to now an enterprise business and a cloud company very successfully and very profitably.
Jim: And well. The stuff is better in some ways than the things they had before. And the Azure cloud, which is the cloud that I use, is actually very nice. And the backend business stuff, the various servers are actually these days good. It used to be we’d laugh. I remember at Thomson, we used Netscape web servers. And Steve Ballmer came out and brought us all on to say, “What would it take for us to switch from using the Netscape servers to the NTII server?” I think it was called.
Jim: And I said, “Well, if you bought all the hardware we needed and gave it to us for free and all the software for free, we’d do it. And here’s why, because it’s unreliable pile of shit that we’d have to have almost twice as much as we would with Sun servers running Netscape.” Because we just assumed that they’d be failing all the time and we’d need a whole lot more to make it work. And you know what he said? Yes.
Robert: Wow. That’s what Nadella has done now. You can see that gigantic pivot they did towards the cloud. Essentially they’re giving it away free, or for very low cost. You don’t have to do that huge upfront capital expense.
Jim: Well, the cloud is very expensive, actually. For running actual CPU, the cloud is something like six or seven times more expensive than owning your own hardware. The issue is of course your hardware requires people and air conditioning and it breaks, and you don’t use it 100% of the time. So for most real-world applications, other than super compute-intensive stuff, no longer makes sense to own any servers. And the cloud is the future of server-based computing, and Microsoft figured that out just barely in time. Just barely.
Jim: If they’d given Amazon two more years, Amazon would have probably won. Such a decisive victory, there was no room for a second big player. So Microsoft came on really fast and they’ve been able to outmaneuver Google, which it’s surprising people.
Robert: That’s the thing that’s so striking is that Google is a distant third, and they’re clawing their way in. Hey, with artificial intelligence, they may have some opportunities in the cloud because they’re going to provide that as a service.
Jim: We’ll see. We’ll see. Microsoft has got more interesting offerings in the AI area than Google does right now. And Amazon, amazingly, something I happen to be looking into for a possible business deal, Amazon and Microsoft, both, but especially Amazon, are now offering quantum computing as a service. And there’s not a hell of a lot you can do with a quantum computer, but Amazon’s wrapped four or five different quantum computers up with an API layer. And so these guys are very, very innovative, and the world that’s coming is going to be extraordinarily interesting in the years ahead, and I’m really glad you’ve given us this amazing picture. This has been so much fun.
Robert: One thing to think about with quantum is the ability to generate multiple models. So when we think about a multidimensional-
Jim: You can generate all the models, not just more. All of them.
Robert: What a great note to end this thing on. We took this wild ride, now we’re bringing it all home here. But yeah, quantum computing and the metaverse is a gigantic topic for the future.
Jim: And actually the conversation I had yesterday with some people who are starting a company, imagine neural nets with each node a quantum computer.
Jim: Before we go, I’m going to let the audience know the things that we didn’t get to were as interesting as the things we did get to. We have a section on internet of things, which in some ways has disappointed, but in other ways, hasn’t. Robotics, a bunch of good notes there. The rise of the peer-to-peer economy, things like Uber and Airbnb. An extraordinarily interesting chapter on education. I have a whole page of notes on that chapter. And if I wasn’t so old, so rich, and so lazy, a few years ago, I said, “Reinventing higher education is the biggest goddamn fat elephant that needs to be stabbed,” and reading your chapter just reminded me of that. That, “Hey, those of you who are in your prime and want to go become a … Hey, who wants to be a billionaire?” Reinventing higher education, even a tiny little sliver of it, and getting it right is an opportunity to make billions.
Jim: And then the last chapter, you think the top of the stuff we’ve been talking about is out there, the last chapter in the book, he goes all in. Okay. We vaporized taxi cabs, we vaporized TV, we vaporized music, but he does it. He talks about the uploaded self. We vaporized ourself and uploaded ourselves to the cloud. We could talk for an hour and a half just on that topic. I have some opinions about it. I suspect it’s going to be harder than people think, but it may not be impossible.
Jim: So if you want to continue this ride that we’ve done, so I thought, interestingly, here on this show today, check out Rob Tercek’s book, Vaporized. Thank you, Rob, for a wonderful conversation.
Robert: Thanks, Jim. If your audience likes that, we can certainly come back and tackle that long list of good questions that you’ve got. That’s the really fun stuff, so I’m sorry we didn’t get to all of that, but we sure covered a lot today.
Jim: We should seriously consider doing a part two. I have been known to do that.
Production services and audio editing by Jared Janes Consulting. Music by Tom Muller at modernspacemusic.com.