a16z Podcast - a16z Podcast: Apple Takes on Payments and Your Wrist

Episode Date: September 10, 2014

NFC (near field communication) technology has been around for about a decade, and with the exception of transit cards mostly outside the United States it’s gone nowhere. Now Apple has debuted Apple Pay. Has Apple filled in the gaps in terms of user experience, sheer number of devices, and retail footprint to finally make NFC work? In six months will we all be swiping our phones at every coffee joint and grocery store? Once Apple has virtualized your credit cards, what comes next? Benedict Evans is joined by a16z’s Frank Chen and Zal Bilimoria to discuss the latest from Cupertino’s finest around payments, the long-awaited Apple Watch, and a bigger (and biggest) iPhone.

Welcome to the A16Z podcast. I'm Michael Copeland. And we have a full house this afternoon to talk about Apple's latest event. With us is Benedict Evans, Zal Bilamoria, and Frank Chen. Welcome, guys. Hello. Hi. Thanks. Benedict, you've just returned from Cupertino and the packed hall there, filled with applause and excitement. Let's take things in order. We start with the iPhone. A bigger, larger number? There was a plus. What's the takeaway here? Yeah, iPhone 6 Plus to sound like kind of like a Microsoft product name, doesn't it? iPhone 6 Plus professional edition with Office. Right. 2014.

Yeah, exactly. 2014 edition. So I thought the phones were relatively predictable, especially given how much had been leaked in advance. And, of course, equally what hadn't been leaked didn't show up. Right. So no big surprises there. It's become pretty clear that a lot of...

part of the high-end market wants a bigger phone and is willing to sacrifice the sort of ease of reaching across it with a thumb and so apple has gone there and so we have two new models one of them which is i think 4.7 inches which is basically a big phone and one is more of a kind of a fablet size um the interesting thing i think is that apple in the last couple of years has evolved iOS 7 and iOS 8 to get away from pixel perfect layouts so that it's now technically possible for them to flex the size of the screen which wouldn't have been possible two or three years ago because the apps just wouldn't have worked. So what they're actually doing is these devices have higher pixel density and more pixels. And if you run an app that doesn't know about these new things on it, it basically just blows them up.

But the pixel density is so high that you really can't tell. And so the text is just rendered as text because the operating system knows that it's text. Any graphical elements are just blown up. But the definition of the screen is so high and the increase in scale is sort of small enough that you actually can't tell at all. So they're actually demoing these phones with apps that have. haven't been updated for this new size. The developers didn't know about it, and you really can't tell. Obviously, there's more space that they could potentially take advantage of,

but other than that, you can't tell. So there's a really smooth transition there, I think, and the obvious takeaway is that this is a competitive problem for Samsung. Because what you've seen at the high-end segment, and bear in mind what Apple hasn't done is change their pricing policy at all. So there's a two, there's a one that's quote, free unquote, on a two-year contract in the US, so $400, $450 phone, which is still high-end. And that's, and that goes from the 4-S to the 5C. And then the 5S drops, the last year's flagship, drops $100. And then there's a new flagship. And then there's a, then the plus, which is a larger one, is $100 more. So it's in the US, it's $300, $200, $200, $200, outside of the US, it's, you know, $400, $500, $600, or whatever

the pricing turns out at. So the interesting thing here is, as I said, we're saying that when you look at the high-end segment that Apple is really the only place Apple competes, they've probably only got around half of that segment, and the other half is high-end Android, and almost all of that high-end Android is with bigger screens. So is it an acknowledgement? I can remember Apple always does this, but they're dismissive of something that they don't do, so larger screens are like, well...

Yeah, yeah, no one wants an iPad that can play, an iPod that can play video. Right, until they do it, right? No one wants a tablet with a smaller screen. You'd have to get a pencil. This is Steve Jobs said, you need a pencil sharp enough for your fingers to use a 7-8-inch tablet. Well, you know, I mean, everything is wrong until it's right and everything's right until it's wrong. Who cares? Clearly what's emerged is that, you know, people do have, are willing to use these slightly larger screens and because of all the stuff that you can do on them.

And so Apple has just shifted, you know, they shifted twice once they made the iPhone 5 was slightly bigger and now it's slightly bigger again. It's worth noting, incidentally, that the phone itself is very thin. It's noticeably thinner than the five. So the overall weight is that much smaller. I mean, it seems like effectively the metric we've gone from is the length of your thumb to the size of your pocket. And of course, with the FABLOT, 50% of the buying population is going to put that in a bag. So, again, it doesn't really matter at all. Right. What I found interesting, actually, is that, you know, the, you know, Apple's foray into China was possibly the 5C, and that really didn't go anywhere.

And the 6 plus with FABLA seems to be the right way to potentially go into and get into Asian markets finally. I wonder how it's going to do in the U.S., but I think it's mostly the Asian strategy. It does feel like the, yeah, when you look at the numbers, the FABLOT has done very well in South Korea. well generally in East Asia, gone really nowhere at all anywhere else. I mean, it's sold a little bit, but not very much. And so Apple is effectively addressing that segment

and also, of course, addressing the mainstream market that just wants a slightly bigger phone that can show slightly more stuff. And what they're not, of course, doing is coming out again with a new cheaper product that can go into the Chinese market. Now, it will be interesting. I would suspect that the $100 cheaper iPhone 5S will do a lot better in China than the 5C did last year at the same price.

The really the dynamic in China was if you can afford $500, it's actually a lot more than that because of all the taxes. If you could afford what the 5C cost, you could afford the 5S and you didn't want to walk into a nightclub with a cheap one. Right.

Because you're already in a very non-price sensitive segment. Very quickly, iOS 8, did you guys see anything that changes? No, there's nothing new there. There's nothing new there. They just did it a brief recap of the features. Obviously, they've adjusted it to include support both for watches and for payments, which we'll go ahead and go ahead and do next. Well, that is, yeah, a perfect segue into sort of what the, from the gasps and the ooze and the booze in our room with the big news of the day.

So payments and the watch. Let's start with payments. Outline is for us. What have they done? So much like, you can kind of see the building blocks that they've had there before with a secure element for the fingerprint. So the way that this works is you buy a new iPhone. You log in with your Apple account that you've already got,

and it automatically loads the credit card that you have in iTunes into it. If you don't already have a credit card in iTunes, then you can waive a credit card in front of the camera, and it will acquire it into the system. And then there's a couple of moving parts. First of all, they have a deal with Visa, MasterCard, and Amex to support this, but your issuing bank has to support it as well. So it's not enough just to be a visa card.

It has to be a visa card from Citibank or from one of the US institutions. It's US only that supports it. then the other part of the moving part is so you've got the, then once you've acquired the card into the device, you go into a store

and the store has to have NFC, which is this very short range wireless technology that's been around for a decade and gone nowhere, which we'll talk about in a moment. So you acquire the card into your phone, you go into the supporting retailer,

you hold your phone up to the till and passbook appears and your card appears on the screen and you hold your finger on the fingerprint reader and it's done. And so the big difference here is So we've had all of these payment systems that have floated around before. And it was always where you've got to take the phone out, you've got to turn it on,

then you've got to open the correct app, you've got to choose the correct card, then you hold it up, then you've got to enter a pin number, then you press go. And it was actually more hassle to do that than just to pull your card out and do the card pin or swipe the card. Whereas with the Apple experience is, you hold the phone up to the thing, and you have your finger on the button, and that's it. So the application is really the touch idea. Yeah, exactly. So the whole user flow of it is a combination of the touch flow and the passbook application,

that they've previously been using for tickets, which means it really is quicker than using a cart, which is never one off of the floor. So, Frank, I want you to jump in here. You know, Tim Cook did that twice, and it almost came off as a joke because it happened so quickly. He's like, look, if you blinked, you missed it. But is that the whole point? And is that one of the things that was holding, you know, us all back from using NFC or

payments like this? Well, there were two things holding back NFC. One was the user experience, and it looked like from the demos, and Apple may have solved that problem. The other was the availability of an NFC reader at the merchant. The good news on the NFC readers is that the United States is about to go through a massive deployment of EMV, which is chip and pin credit cards. The same reader will also support NFC, so merchants won't need two different or two different upgrades. So it looks like there's a lot of momentum on the merchant side to be able to take these newfangled iPhones as payments.

I mean, I think there's a broader point here, which is, as we said, NFC has been around forever and gone nowhere. And one problem was the lack of the right user experience in the device. The other was just this general lack of momentum or critical mass behind adoption anywhere. So the retailers didn't have the couldn't read them and had no incentive to get them. And now the US shift to AMV gives them an incentive for that. Meanwhile, from the device point of view, Android has had NFC for a couple of years, but you know it was like one device or two devices or some devices. So there might be a couple of hundred million Android.

devices in market that notionally have NFC, but nobody knows, and nobody knows if their device has NFC or not. Well, I wonder if this kickstarts Android efforts in NFC. It's because Apple, it's because Apple can say there is one device and it's in every device. It gives a lot more clarity, like every new iPhone has this. And because of the market scale that Apple has uniquely kind of in the USA with 40% of smartphones, they could then go to all the banks and all the retailers and say, this is all going to work and let's all just, you know, get behind and push, which is kind of what, for example, the Japanese operators were doing in Japan 10, 15 years ago, that they would say every phone, every retailer, every card, it all just works,

and then we can try and get the flywheel going with consumers. And that was what Google could never do because it had such a different approach than the market. So let's use Japan or Korea as an example. Did it work? And is everyone using it? Well, yes and no. So when you look at the numbers in Japan, it worked pretty well for things like transit cards. It's worked very well for things. things like loyalty cards. And Japan is a very loyalty card heavy market like the US, unlike, for example, the UK where I came from. So I was kind of startled when I moved here that every corner grocery store I came into offered me a loyalty card, which just doesn't exist in Europe

in the same way. Right. Well, you have no loyalty. But then nobody in Japan uses credit cards. I mean, in Japan, you're quite much, you go and pay your taxes in cash. You get $15,000 at, and you put them in a bag and you go to the post office and pay your taxes. So it's difficult to extrapolate too far from Japan or South Korea because they have these sort of market peculiarities. I think the core issue here is that what Apple is trying to do is remove all of the building, all of the obstacles and get all of the building blocks all locked together and all kind of synced and turning, mixing my metaphors here, get all of the gears turning at the same time in the same direction with one kind of complete integrated product. And I think the problem

that Google has had is because of the sort of launch early, launch often and iterate approach, you've never had a complete solution. It's a little bit like, trying to launch FedEx with one city and one airplane, you know, it doesn't work. You have to have 50 airplanes and 200 trucks and, you know, 20 cities before it starts working. And that's, I think, the approach that Apple has been trying to take care. I mean, the proof in the pudding is going to be the user experience. If it's really as simple as taking your phone out, putting your thumb on the touch ID and, you know, touching the NFC sensor at the retailer, then great. But I think that's going to be really the critical

thing that's going to actually drive adoption, because that's what I think I'm, I think that's where the concern is. And do you think that they have, um, they and a, a camera out of the gate, at least, with enough partnerships to sort of prime the pump on this? I think they probably did, yes. I mean, it's also worth noting that there's a bunch of issues around, for example, the data breaches at Home Depot and Target, which tend to reinforce these kinds of trends. There's an interesting thing here that's worth thinking about, which is once you virtualize the card, what do you do next? Because the model that Apple is talking about now is, well, you know, I apply in the mail for my Capital One credit card and it

arrives and then I wave it in front of the iPhone camera and it gets acquired into my iPhone and then I presumably put the card in a drawer or shred it or something. But that's not, that's a bit like saying, well, the way you do digital music is you order a CD on Amazon, you rip it into iTunes and then you sync it with your phone. That's not, that's clearly not the end point of where this is going to go. And so you can ask, well, okay, what happens to the access, right? Right now, Apple is saying, well, no one gets access to the payment information. The way HealthKit works is there's a repository of health kit information and apps can ask for access. So what happens if Mint gets to ask for your payment information?

Well, of course, that's a bad example because Mint has your bank. But what happens if an application could ask for your payment information? What happens if I could download the American Express application and it can say, can I see your payment information? Oh, I can give you a better deal. Press here. Right. And then in 15 seconds later, a new American Express card arrives on your phone.

so once you virtualize it all sorts of other interesting things start becoming possible do we have any evidence and Frank chime in here from the iTunes store for example I mean there's been no evidence as far as I can tell

that Apple goes in that direction it's very much sits in the middle in between these vendors well I think they're interested in providing platforms I mean there are always these sort of fantasies that Apple is going to become the giant octopus and it's going to do everything

and they always when it comes to the crunch they always back away from that and say, no, no, no, no, no, we make phones. Right. That's what we do. Right. We're not an airline. You know, we're not a mobile network operator. We're not a movie studio.

We make boxes with circuit boards in. And, I mean, we're talking about this earlier, that you can describe Apple as a sort of club where the price of membership is buying a new box every two years. And the benefits of being a member of the club keep expanding in terms of all these sort of incremental services around the edges. And a box being a phone or an iPad or a watch, which will come on to, in a moment. The other interesting thing we should just kind of put on the table to talk about is that there is an API for Apple Pay. So your iPhone app can, instead of requiring you to type in your

credit card number, it can just ask for the credit card that's on the phone. So there's a buy with Apple Pay button in your app and up comes a little panel with a fingerprint scanner and says you're going to pay Uber $35 and you put your finger on the scanner and it goes through. describe for me or translate for me Apple pay is sort of analogous to what we have in the world today is it like PayPal is it like you know I don't think so at all I think it's it's well this is kind of my point about how far Apple moves into adjacent value chains which is they kind of don't you know Apple didn't become a music label for example right they just became they replaced tower records they didn't replace universal music or EMI and they're not replacing

city group here with the way PayPal would. They're riding the credit card rails that already exist. Exactly. They're just taking that piece of plastic. And basically, Apple kills little pieces of plastic. So they kill floppy disks and then they kill CDs and now they would like to kill your credit card. But the card, all of the actual doing of being a credit card company

is not about supplying you with little pieces of plastic. It's running a payment network and thinking about fraud and credit risk. Well, and offering you credit and charging you. That's what it is to be a credit card company. And Apple has no interest in doing it. doing that. Any more than they have any interest in, you know, sending guys with interesting haircuts to nightclubs at 3 in the morning to look for bands. They don't want to do that. They just want to sell the MP3s. But they do want to be your wallet. And if you contrast

what's happening in Apple Land with what's happening in Android Land, if you've tried NFC payments in Android Land, you have lots of stakeholders with their own applications clamoring to be your wallet. So you have ISIS, now known as SoftCard. You have the carrier itself had a wallet. Sprint wallet. You had Google Wallet wanting to be the wallet. And basically, it's like when you have to choose an application to handle an application type, right? You get to the terminal to say, which wallet do you want to handle this? In Appleland, it's going to be Apple. And the smoothness of the user experience you can deliver when there is one dominant wallet, as opposed to five or six, clamoring to be your wallet, is going to be hard to beat. Yeah, I was going to ask,

let's, before we move on to the watch, I mean, do you think that, you know, we're going to start seeing people swiping their iPhones at stores and we're touching it, whatever the action is? I think you're going to see a lot of people using it. Yeah, I mean, the combination of the ease of use, I think, is the interesting part. I mean, this has always been the question, both with payments and with watches, has been, it's not so much the what as the why. You know, yes, you can put a card into a phone. You've been able to do that for five years. Now, Apple has a, made that easier, they haven't given you any sort of compelling reason why you do it other than that it's sort of less hassle than taking your card out and swiping it. And for the last

10 years, people have said, well, it's not that much hassle to take your card out and swipe it. It's not broken. It's not broken. And I think this is whereas, say, for example, the record industry was broken because they made you buy 10 tracks instead of the one that you wanted, for example. So you think, well, okay, there's nothing wrong with this way of doing it as opposed to the other way of doing it. And you'll, you'll see people doing it. It's not quite clear what massive problem this solves from an end user, other than, well, it takes you a bit longer to take your card out of your wallet when you get to the store. Although I have gone to stores where I had forgotten my wallet, my plastic, but I had my phone

and I was just so frustrated that I couldn't pay. So for people who like me are very absent. It's awesome. Well, this gets me back to the point I was making earlier about, well, what else can you do once you virtualize the card? Because if you could get to the point that, you know, I could you know, I can get a card in five minutes instead of, or if I lose my card, if I could get the thing in five minutes instead of waiting for the mail. I mean, maybe that's the point that this isn't so much about killing. The card is about killing the paper mail, or you've got to wait for the thing to arrive. I mean, to take a very common analogy, like this is probably more of a vitamin than a painkiller

at this point, right? Like, you're talking about, like, what is truly mobile payments, getting into, you know, ordering a lift car, getting into it, and then not having to take your phone out, they automatically charge you and you send the rating in after the fact. That is truly mobile payments. So one can kind of think about Apple Pay, NFC, you know, this idea of facilitating offline commerce, you know, brick and mortar commerce as a bridging solution until kind of, you know, maybe 10, 20, 30 years from now when like everyone's got mobile apps and mobile devices and tablets

and even every retailer, every supplier and every buyer as well has all of these devices and apps and this can all happen automatically. But I think until then, like you need this potential solution potentially, but I think it may just be a vitamin at this point. I mean, I think this comes, I mean, it's a good sort of way to lead into the watch because I think what I was saying last week was that for both of the things that were rumored that have both come true, which is both the watch and the payments, you can certainly see how you could make a thing.

The question is, and the thing might be really good, but it's not entirely clear why you want the thing in the first place. It's worth talking about this vitamin versus painkiller thing from the merchant's point of view. So something very interesting is happening next. October, which is the liability shift. So what the liability shift means is who owns the liability when you have a fraudulent credit card. Today it's the card associations or the issuing banks. In October 2015, that will shift away from the payment networks to the merchant or the card issuer. And so if you don't have one of these EMV or NFC devices,

and somebody swipes a fraudulent credit card, all of a sudden, you as the merchant for the first time are responsible for the losses as opposed to just pawning it off on your card issuer. And so when that shift happens, the merchants definitely have a pain killer here, which is they'd love for you to use your iPhone or another NFC device

because then they can't own the fraud associated with somebody owning a fraudulent credit card. And again, for security reasons, if I lose my phone, it needs my fingerprint to associate with my phone and make a payment. and it seems fairly... Yeah, so I mean, we can dig into this a little bit more. So basically the phone does not have your card number on it.

It's a set of tokens which neither Apple nor the retailer itself ever actually see. Right, this is what they're calling the secure element feature. Yeah, so it's this complex set of crypto, which means that nobody actually sees the card number. It's just that your card issue and knows that it's you. Which, of course, speaks to the problem that we saw at Target of target systems being hacked. Well, in this case, Target would never have seen the cards in the first place. It also means that if the phone disappears, even if it's unlocked, somebody can't get your card numbers off the phone. All they've got is these things.

And, of course, equally, Apple, you know, you can wipe your card your phone remotely. Remote wipe. With remote, so you can just kill it. And your cards have not been stolen. So you don't need to cancel all of your cards. You just remote wipe the device. The other part of this that is very different from Google is that Apple doesn't know, at least according to Tim Cook, what you bought, how much you paid for it. I mean, there's none of that sort of loop of information.

Exactly. Well, this is the interesting thing about health as well. So Apple is making this repository in iOS 8 that stores all the health information from a watch, from any wearable that you have, anything you input into it. Any app on the device can ask for that with permission. Apple never sees it.

And that's obviously very different from the Google approach. And it's something that Apple seemed to be trying to build up as a marketing point. Obviously, we saw Microsoft try and build privacy as a marketing point and kind of fail. But Apple is kind of keep circling around and coming back to this point that we don't need to know anything about you. Our business model does not depend

on us knowing stuff about you. I mean, it's not clear how much we all consumers actually care about this stuff. But it is kind of an interesting point of difference. Yeah. Apple's made the money it wants to make from you as soon as you buy the iPhone. Right.

It doesn't need an ongoing stream of advertising revenue on the back of that for it to make its business model work. So the watch, did you, Benedict, pick one up? Put it on your wrist, wave it around. Picked it up, put it on my wrist. It's not finished. The one that you can wear just has a looping video.

The one that you can look at is firmly on the wrist of the Apple employee, and they're in a scripted tree that they don't deviate from. So you can point at that app, but they won't open it for you. So it ain't done yet. But, you know, they said it's not done. It's not shipping until the spring. So there's a couple of observations. One is it comes in two sizes.

The small one is perfectly small. It doesn't feel like you're wearing a brick on your wrist. It's not a $5 quartz watch that's incredibly tiny and plastic, but it's not a big lump anymore. They're not talking about battery life at all, and they've not given any technical specifications. They kept saying all day, all day, all day, but they clearly expected to charge it every night.

Every night is kind of okay. And the Android stuff on the market, most of them seem to more or less make it all day. And since Apple has obviously much tighter control of the hardware and software, you'd expect them to do a bit better. I mean, they tend to do 10 or 20% better with the phone, so they should do that on the... So to be clear, it sounds like this watch will last a day.

It should do, yeah. That's certainly what they're promising. It seems like an accessory. Yeah, so this is not a replacement. It's not a replacement. Well, yeah, but Android Wear isn't kind of replacement either. There's a basic battery issue here, which is you cannot stick a 3G chip in a device that small

with a color screen and have it last all day. It's really, really hard to do that at the moment. So all of these things need some kind of, kind of other thing, which means a phone, and this needs to be run from an iPhone, just as the Androidware needs to be run from an Android phone. Now, that said, there's a really big philosophical difference, because if you look at Androidware, it is really essentially a remote screen for Android. I mean, it's all you've been wearing one for a while, but, you know, fundamentally it's about displaying and interacting with notifications on the device, plus a few

other things like Android, like Google Now, and they've just started rolling out an SDK that lets people start writing apps for it, but that's kind of a secondary focus. For Apple, this is a, and this is a standalone device. I mean, except that it's got like a remote modem in form of the other things. It's got, it can have, you can put apps on it. It's got a full-on UI for choosing different apps. It's much more of a little computer. It's a standalone device or device says. We were talking about, like, what sort of, sort of buckets does it, you know, fill as a, as a watch. It's a bit more like Apple TV as opposed to Chromecast. Again, Chromecast is just a remote display. Apple TV is more like a little thing of its own.

which you sort of need an iPhone at some point, but you can kind of use it without as well. And I think that's the same thing here. And it's a platform. And so the thing that I was really strongly reminded of was the original iPad, where, you know, the demo, as this is again the point that one of my colleagues were saying,

it felt like there's a kind of kitchen sink thing going on here. It's like how many different use cases can we show you? It can do this, it can do this, it can do this, it can do this. And the underlying point is it's a piece of glass, and it can do anything. And that was the inside of the iPad. It was the inside of the iPhone. It gets transformed by whatever app is running on it.

And so then when Apple launch the iPad, they're like, well, it can do spreadsheets. It can do books. It can do video. It can do the web. It's like, we didn't really know what people are going to do with it. So let's just show you a whole bunch of things you can do

and see what sticks. And it's pretty clear in hindsight that, for example, Apple probably wouldn't have bothered doing books, you know, that was just kind of a hedge. And they made a keyboard. They made a keyboard for the original iPad. They made selling them off. Because that turned out that you didn't need.

that. And that was the same thing you saw here. It's like it's a little piece of glass on your wrist. Well, you can do with it. Well, you can do anything. It's got Unix and a CPU on it or whatever you can do on a piece of glass that size it can do. So let's try and work out what that might mean. Whereas Androidware is much more kind of reflecting the two companies' philosophies. Android wear is an endpoint for the cloud. Whereas Iowa, whereas Apple's and an Android phone, in a sense is more and more an endpoint for the cloud. But let's just make a clear distinction here. Like, you know, the similarity here is, you know, the card metaphor is quite alive and well right now with the glances right so this is like google now

cars and androidware apple's calling glances you have these you know lightweight apps that can be you know whether it's a fitness app an exercise app a workout app a workout app a clock app whatever the case might be and you swipe and you can kind of have that kind of really lightweight experience that androidware also has that i've been experiencing with the watch that i've been using yeah i think that's right i mean you can kind of over systematize this there is just kind of that slight difference in philosophy that where kind of needs to be lit up by Google, whereas the Apple Watch doesn't really need to be lit up by something somewhere else in quite the same way.

It requires an iPhone 6 or an iPhone 5. Yeah, you need something to kind of enable it in some way. But it's not a remote screen in quite the same way that Android wears. They saw those people running. They saw those people running in the video and they were using the watch. They had to have an iPhone with them because the GPS had to be required in order for them to be able to run their various routes. Right. Yeah, yeah.

I mean, the way I think about it is, look, Apple wants you to be part of the club. They want to have as many products in that club to make club membership super compelling, right? And so the watch makes you a member of the club, requires an iPhone. The anchor tenant, by the way, the thing that gets you in the club is the phone. And everything else Apple makes, in my view, is going to be an accessory to the phone. The watch is an accessory to the phone. The Yosemite, the next version of the Mac OS, makes the... the Mac an accessory to the phone, and it really just makes club membership that much more

compelling, but it all ties you into the Apple ecosystem. And you're not going to see watch that works with an Android phone, right? Like, they're just not going to do that. Yeah, so the interesting thing is if you look at, but going back to the app of the new iPhones, you know, would you buy the iPhone 6 plus and an iPad mini? Probably not, because they're pretty similar in size. Would you buy an iPad Air and an 11-inch MacBook Air? Probably not, because they're really close in size.

Would you get a watch, an iPhone 6, an iPad Air, and a 27-inch IMac? Maybe. So it's kind of a question of, well, which adjacencies do you want on the spectrum? Now, you can see they're kind of taking this to the logical extreme. If you look at Samsung, which has a device at every half-inch increment from 2 inches to 15 inches, or more if you can clear the TV. In the TV, they go all the way out to like 100 inches. So, Benedict, you raised the question of why, the why part.

Did we get an answer? I feel like we were much closer to the, we were Y in the iPad. It was much more of an iPad, why, I thought, which is, well, there's clearly going to be stuff here. It's not quite clear what, but we've basically got a little Unix computer on your wrist. And I think the other piece. to this incidentally. And again, I think this comes back to the iPad, is if you look at all the other tablets before the iPad, well, they were all rectangular screens that did touch. So like, there's nothing new about the iPad, but of course there was. And I think that's the other thing

here is when you look at just the hardware design of it turned off, forget about the operating system, Apple have kind of nailed a nice thing that you would wear on your wrist, whereas all of the Android devices are still, I think, kind of more minority. Well, I'm waiting to get my Moto 360 tomorrow from Google I.O. Well, there are a bunch of people at the event today with a 360. It is, I would say, double the volume. Maybe more. The 360 is double the volume.

The 360 is double the volume of this small Apple model. Maybe more. So, Frank, as we were watching this, we were talking about, I think it was Johnny Ive and Kevin Lynch were trading doodles and heartbeats and things like that. And you brought up the question of community. And whether some of the, say, fitness apps and or. other apps that are already out there, they do a really good job of building community.

And so does Apple need to have this community built in? Do they build it themselves? How important is it going to be in the launch? Most of Apple's community and social efforts have failed, right? They took Ping out of iTunes, Game Center. I still don't know anybody who uses Game Center. So those things have not worked. And so it's not instant death for RunKeeper or Stravia or FitnessPal,

like people who have built very vibrant communities. So it would be interesting to see if they take another whack at it, to see if they can build a genuine Apple community. It's very ironic that Apple's failed in social because they have the biggest fan community for their products of all time. But they've never been able to part-day that into an active-engaged audience. Except on the Apple Forum, which is the world's greatest sort of answer community. I think there's a broader point in here, which is, again, if we go back to the celebrity photo leaks of last week, that Apple always talks about owning the whole experience and control. the underlying the core technology and you know they make their own chips you know they've got

they make their own processes they make the chips and integrate everything for the watch and the phones you go and look at what they do online and yes iosate is full of cloud and yes there's all these really tightly integrated and very clever things that use the cloud to enable these devices but you know the email is running on oracle the find my phone is running on something else the photos are sitting on azure not there's anything wrong with azure but it's not it's all kind a third-party stuff tied together. And that results in good experiences and good products. But every now and then you see the cracks.

So, for example, the thing with the photo leak was, well, some bits of iCloud used to do factual authentication, but other bits just don't because it's not built on one common platform that Apple designed from the bottom up to do iCloud. I mean, there was a great blog post a year, a couple of years ago, by someone who had been at Amazon and went to Google, talking about how everybody, everything at Amazon was one platform and all Amazon products and services were built on top of it.

of that platform, whereas everything at Google was built one-off next to each other as like a new thing, and that Google had to change that, and a lot of what you've seen in the enterprise side of Google indeed has been about turning into a platform. Apple does not have a platform in the cloud at all, and you kind of see that, that what you've got here are lots and lots of endpoints that are delivered and do great stuff, but they start from the user experience, you know, it's like saying, well, we're going to have an email, it's like Google saying, well, we're going to have an email service, so we're going to be an email service. And then we'll go off and work out what the backend service provision is.

And we'll just like, we'll buy the Oracle one or the SAP one. And then we're going to do maps and we'll, you know, it's not built from the architect from the bottom up. It's built from the top down. Frank, last thoughts. Well, I think again, I'll go back to the phone being the anchor tenant. You can buy your phone every two years, right? And everything else is an accessory that you buy less frequently than that. And as long as they've got you on the upgrade treadmill of every two years you buy this new anchor tenant, it'll drive the need for the other accessories on slightly longer time frames and then Apple's happy you're part of the club yeah and each accessory locks you in so you've got the phone you've got the once you've got the watch then your

next phone is that much more likely to be an iPhone and once you've got the iPad then your next watch is that much more likely to be an eye watch and so on so they all into reinforce each other and credit cards and debit cards at the end yeah all of that integrated into the Apple ecosystem well I will be looking at your wrists for the next couple of months and also at how you're paying for things when you take me to lunch thank you gentlemen Thanks, Michael.