Sharp Tech with Ben Thompson - The Strategic Logic of the iPhone 16, Services Upside and Downside, Steve Jobs and Modern Apple

Episode Date: September 12, 2024

What Apple's iPhone event signals about priorities for the company, a digression on the App Store and its attendant risks, and thoughts on what Steve Jobs could and couldn't change about Apple in 2024.

Three, two, one. Hello. Sorry. Wow. Wow. I think we need to keep this in the podcast, Andrew. We just had a discussion about your hello's. Look, full disclosure, the hello is stressful when I'm shortening it for Sharp Tag.

Hello. I know you want to drop the long go tag. Yeah. Well, there you go. Let people behind the curtain a little bit. I'm Andrew Sharp and on the other line, Ben Thompson. Ben, how you doing? Are you anywhere near as embarrassed? I'm doing fantastic. No. I'm doing great now. Just a real sort of uplift. I enjoyed that. I'm going to save that. I'm going to play it for my kids. I listen to a lot of goat in the car. I already mentioned the last episode. People already have the context for it. This is great. Maybe I'll have to switch to bonjour full time after this one. All right. We're going to be talking iPhone. today. We had 98 minutes of pure electricity out there in Cupertino. So I thought there were two interesting conversations in the wake of the announcements Monday, one of which you wrote about

explicitly, and that's related to specifically where Apple is as a company now. And then the other was more abstract and gets it what Apple has meant to people in the tech ecosystem over the years. So we'll do that second. We'll start with the specifics. I'm going to read through some of the features announced on the iPhone 16, not the iPhone 16 Pro. This is the iPhone 16, the base model. And I'm reading from your article on Tuesday. The A18 chip appears to be a bin version of the A18 Pro.

There is one less GPU and smaller cachets. Do you need to explain the bin version? Yeah, please. So I think it's cash. Cash is cash? What is the plural of cash? I think it is cash. Actually, now I think about it.

But yeah, so when you're manufacturing a chip, there are defects. And ideally, and there's also like just sometimes chips can run hotter, run slower or like there's just, you test every chip that comes off the line. Actually, all the testing infrastructure is another sort of piece of the let's onshore, all sort of chip manufacturing to America. like it's another piece that is actually distinct from the actual fabrication that needs to be on short if you want to have a truly sort of domestic sort of chip market. Anyhow, the bit here is there can be defects on the chip.

And so a bin chip is you have some chips that have flaws, but you can just disable that part of the chip and the rest of the chip is fine. That's called binning. And so like Intel, for example, say they launch, they would have like a chip. They have the I3 version, the I5, the I6. the I-7, the I-9, all of which would many times be variations of the same chip just bent or sort of how performant they could be. Apple, this is not new to Apple. Apple's done this for a while.

In this case, the A18 Pro has, I believe it's five GPUs. The other one of it's four might be six and five. Sorry, I don't have it in front of me. But the idea is if one of the GPUs is flawed, you just disable that and you can still use it as sort of the lower-end chip. Same thing with cash. Apple's, it's all still a system on a chip. they haven't gone to sort of the tile approach yet. So cash is sort of on chip.

So there's what's called a memory hierarchy. So the most closest memory is what's called registers. That's like internal to the chip. Then next to it, there's L1 cache, which is very small, very fast, very tightly tied to the chip. Memory can move very quickly into those registers so they can be operated on the chip. There's L2 cache, L3 cache. Then it goes out to system memory. The difference between stuff in cash,

and stuff in system memory is astronomical. It's like the difference between a bullet train and like a car or something like that. Or and then like from system memory to a hard drive is like from a car to walking. And so like there's these huge sort of drop-offs in performance. So what we have here is we have some chips that have more GPUs and more cash. What that definitely sounds like is it's the same chip. But if there's a flaw in the cash, then they can just disable. some of the cash, and if there's a flaw in the GPU, they can disable the GPUs,

and those become regular A18s instead of A18 pros. Now, what happens if you don't have enough flawed chips? Well, you're still disabled anyway so that you could sort of like, like, fit in there. But the long and short of it is, is this is number one, it's super common. This is just something that has long been done. And it's been done with iPhone chips. It just used to be the, for the last few years, this sort of bin chips were saved for the next year. Now it's happening sort of right away. But so the takeaway is it's basically the same chip

between. Yeah, I was going to say, my understanding of your article was that the A18 chip is nearly as performant as the A18 pro. Is that accurate? Yes. Yes. That's right. It's slightly lower from GPU and that GPU can affect some sort of, you know, AI sort of related stuff. You know, we don't know the full details of all Apple's models works, how much they use the neural engine versus the GPU, but then also there's going to be a performance hit by having a smaller cache, but the actual sort of like processor itself and the speed and whatnot and the speed of GPUs and the neural engine are all the same. Okay.

So elsewhere, there are eight gigabytes of RAM, which is necessary to run Apple intelligence. There is one fewer camera than the iPhone 16 Pro, but the two camera system that remains has been reconfigured to a much more aesthetically pleasing pill shape. Yeah. So this is, this is sort of, I sort of, I sort of. to throw this in it as a kind of an opinion that I threw in there. I think the iPhone, I think the iPhone 16 looks great.

And part of it is I like the camera shape much better. And also, one of my surprisingly big annoyance of the iPhone 15 pro is that camera mountain is just too big. And it gets in the way a lot. Like, for example, I have a MagSafe mount in my car that, that, you know,

and there's a brace around it that holds, the MagSafe, you can just set it there, it's super convenient. I love it. Like, one of the reasons I, you know, I want to stick with MaxSake forever. It's, it's a, it's a sort of a great new change for iPhones. That mountain gets in the way because it like, it impinges on sort of MagSafe space. And, you know, that's just a small example, but I find I run into annoyances about how big the camera is sort of all the time. That's interesting. I never have in the entire time I've had my 15 pro. Yeah, well, I mean, I'm persnicky. What can I say? But, yeah, I think, you are. You are. I'll let you finish your rundown here.

Yes, we're at risk of making this opening segment as boring as the Apple event itself. So we'll get to the point. The iPhone 16 will be able to capture spatial video. The screen isn't quite as good and the bezels are a bit larger, but the colors are more fun. And at $799, it is $200 cheaper than an iPhone 16 Pro. And since the price has not been adjusted for inflation, $799 today is equivalent. to $657 in $20, which you pointed out on Monday.

And then in keeping with that theme, on Tuesday, you wrote that the iPhone 16 base model is arguably the best deal in iPhone history. So why were you compelled by this phone? And how does that price relate to where Apple is as a business today? This is the key thing. I'm glad you sort of started with this because, yeah, this phone is an amazing deal.

It is, you know, again, it has one less camera, which is the most visible sort of change. I mentioned the sort of screen sort of thing. The processor is slightly not as good, but it's not sort of the previous years where it's a year behind. It has less RAM. Like there was,

even though Apple doesn't advertise those sorts of things, and they do mention which chip is in which phone. They don't talk about things like RAM generally. But those are real sort of performance concerns. Like I use my phone pretty, pretty hardcore. And I like, I basically do work on my computer and almost everything else on my phone. And there are just,

the edges of that high performance, even though they seem sort of not a big deal, maybe don't impact day-to-day life, I care about, and I'm going to buy the best one. And this is the closest in a very long time where the old iPhone feels close to the new one. And it's interesting because what's driving that is the fact that the most important feature for Apple going forward is Apple intelligence. And Apple Intelligence needs the latest processor, and it needs a lot of RAM. And so you have the situation where you have the same levels of RAM. Now, next year, there's a report. They might go to 12 gigabytes of RAM on the high end phone, and that will be a nice differentiation. Is Apple going to talk about that? It will be interesting. They've

never talked about RAM in the context of phones. But at least for this year, they had to bump up the lower end to be basically as good as the high end because this sort of software differentiation that is going to be their most important selling point going forward demanded it. Now, this is a good thing for Apple to do, to be clear. This is what they needed to do. But the reason why I wanted to highlight this bit specifically, it's an interesting sort of inflection point where for Apple, it's always been about the integration of hardware and software, and that's been their selling point. We hear it a million times because it does actually mean something. And it does still mean something sort of in this case. Apple has really good chips that makes their vision of

running these AI models a good portion of them locally possible and viable. and probably more performance than other phones. I did sort of like, we talked about last episode about I really should get back into Android a little bit to understand just use sort of Google's vision. Total mess. Absolute total mess. I've been doing some research about it.

Like the pixel uses like a Samsung modem, which is apparently terrible. It sucks battery life. There's connectivity problems. There's complaints all over about it. It kind of makes it a non-go for me. Like, again, I'm so dependent on my phone and I travel over the world.

So I have to deal with lots of different fans and things like that. I don't want to have connectivity issues. I'm looking at Samsung. Like the Taiwan model has two physical sims. It doesn't have a e-sim. So I have to get the global model. And then there's like reports about weird, you know, again, a sort of ban sort of thing.

Apple stuff, it just works. Like they bit the bullet. Yeah. They bit the bullet. They tried the Intel modem. It was kind of a mess. They bit the bullet. They made nice with Qualcomm.

They're paying them a lot of money, but they made sure they had the best modem. And they're trying to build their own modem because they want to get rid of Qualcomm. But to their credit, there is no evidence they will compromise the actual performance of the phone until their modem is legitimately sort of competitive with Qualcomm. And maybe that will never happen. We'll see. But what I know right now is if I go buy another iPhone, that iPhone is going to work and work well for my use cases here in Taiwan and back in the U.S. And I'm not going to have to fiddle around with like all this like there's all these like you you go to the other stuff.

It's like, oh, just do X, Y, Z, download this and do X, Y, Z. No, I don't want to do that. Like this is the whole Apple selling proposition. I don't want to fiddle with my. No, exactly, right? And so it's funny. Like, like in some respects, I'm left after this past week with a greater, a renewed appreciation for this sort of Apple sort of selling point. But part of the integration of hardware and software.

is it was both. It was software and it was hardware. And one of the key things was software as a differentiator is software from an economic perspective. It compels commoditization on the hardware side because the costs of software are immense on the sort of upfront. On the back end, you have the zero marginal cost. So when you're investing in software, you want it to work and run across as many devices as possible. Now, this is why Google talked about back in the day, why they aired with Android in their early days. By favoring Android from a software perspective, they were actually hurting their business because their business is best when it runs everywhere, including on iOS devices. And they did course correct, I think pretty significantly in about 2013 or so to reprioritize iOS

in sort of their development in a way they had sort of fallen off the wagon a little bit there. And part of the whole debate about should Google focus on pixel and focus on hardware is there's a real cost involved in that, which has these huge investments, shouldn't they be trying to offer it everywhere? Apple is sort of in the opposite camp where as Apple intelligence or as these widespread investments, as they're building a new chip potentially for a server or they're building their own server farms to do this or the private cloud and all these sorts of things, these are large KAPX investments, they're large R&D investments. that from an economic perspective, compels them to get their line in a position to maximally leverage those investments. That means that the way that manifests, and we saw it in this keynote, is the biggest takeaway was a real absence of differentiation for the pro line. Inverting some of the logic that we outlined on Monday when we're talking about Apple's incentive to extract as much revenue as possible with different models and different sort of

That's right. Performance. Now they just want people in the iPhone ecosystem. Is that right? That's right. And services has always been sort of driving in this direction. But there was a bit where with the services story, they sort of got it for free to a certain extent because they own the hardware. And it didn't matter if you had a regular iPhone or an iPhone pro. Services is sort of an ever increasing revenue line. It's been, it's really been driving growth for the company for quite a while now. And and so they have that structure in place where software was increasingly driving their sort of long-term outlook from financial perspective. But the software, you know, that was part of the whole lure is someone could buy a used iPhone and they'd be a part of Apple's services ecosystem. This Apple intelligence bit

changes the equation. And I'm kind of upset at myself for, I just like, it's so funny. Two years ago I wrote Apple is a services company. They're pricing like a services company. And then I didn't, it's like I didn't believe myself. I didn't trust myself. I didn't trust myself. And no. And it actually makes sense. They need to get people onto an A18 chip level phone or A17 pro in the case of the 15 pro with 8 gigabytes of RAM.

And that means keeping the price down. Because it has to filter down through the lineup and sort of make this sort of broadly available in order to make sense their economics for Apple intelligence. How will Apple monetize Apple intelligence? though. Is it not just a feature that's designed to tell? It's not about monetizing Apple Intelligence per se. It's that, you know, they're putting a lot of work and expense into this. And that work and expense is likely only to increase in the long run.

And we should get into, you know, I do still wonder Apple spun a great Wall Street story with Apple intelligence where the actual expensive stuff, these massive $100 billion models or whatever they are. are going to be built by someone else and Apple can sort of sell that spot to the highest bidder. Mm-hmm. Is that the Tim Cook doctrine, which stated that Apple needs to control its most important technologies? Doesn't sound like it. Doesn't sound like it. You know, like, should they actually, I've talked about them bi Anthropic or mistral or something like that or even maybe like, like should they be building their own model? I think there's a real debate and question to be had to what extent is Apple sacrificing the long term for a great Wall Street story and sort of an easier path in the short run.

But even absent that, even the expenses there, there is just sort of an economic law in tech, which is software wants to run everywhere. That's how you gain leverage on your investment. And what that means is a flattening of the iPhone line. And again, maybe we'll look back in a year and the pros are like foldable and they have like 47 gigabytes of RAM and they have a different processor. And they just, this is the one year hiccup where they needed to get everything to a baseline level. That might be the case. But, you know, the iPhone's been out for 17 years now. Like what more is there to do, right?

And that's not, Apple's not making a mistake here. That's the key thing. Apple's not necessarily, again, maybe they're making a mistake as far as not buying their own large language model or building their own large language model. But in the case of the iPhone, I don't, I'm not trying to say they're making a mistake. It's just this is what happens. Electronics and computers get cheaper over time. The fact that Apple only really got cheaper, again, in real terms, 13 to 14 years into the iPhone's life cycle is pretty incredible. They were actually raising prices for years.

and years and years. And it just... And that's the frame for this entire conversation. I mean, like, I try not to think about inflation that much because I can't control any of it. And the more I read, the more I'll be upset. But I saw the iPhone numbers that you wrote about on Monday. I didn't realize quite how dramatic inflation has been over the past four years.

It's real eye opening, right? I mean, I come with a trigger warning, frankly. But they didn't raise prices and haven't throughout that time. Yeah, I think it's, it does speak to how insidious inflation is because like when you, when you say Apple has reduced the price of an iPhone by $200. It's like, wow. Where did. Where's that come from? But that is exactly.

That's what's happened. Right. Like it's, it's, that's what inflation is. And it's a departure from the way they've handled this line throughout its run. Um, would you say that the emphasis on treating. services and Apple intelligence as like a primary growth center is a strategic choice or is this just the limits of innovation making the choice for them? Because to me, watching the event, I mean, it just, it looks like the chief problem is that Apple's phones have gotten so good

that there's no more room to optimize and compel people to continue buying new hardware and upgrading every year. So in some respects, they're just running into the limits of physics. And it's understandable and inevitable that they would shift their focus to growing the services business. For sure. For sure. I mean, and that's the bit about the services business that I think everyone that's mad at Apple about

the app store and things along those lines needs to sort of grapple with. And I'd say particularly the sort of real Apple focused sort of fans and commentators is there's there's probably a lack of appreciation, the extent to which how. critical and important this has been for Apple. And to Apple's sort of credit, you set aside all your sort of personal feelings on the matter. It's pretty remarkable that a hardware company with the best hardware product sort of of all time

from a business perspective has really seamlessly transitioned to a world where it's pretty flat and yet they're still sort of valued as a company that is growing. And that is all because of services. And, you know, to the extent you want a healthy and growing Apple and you want sort of, you know, cheaper iPhones. Your stock to go up, right? This, you know, it's been a phenomenal success and probably actually underrated in part because of all the criticism, probably underrated from a business perspective. What an incredible transformation it has been.

Yes. Well, and as far as Apple's emphasis and the way they're pricing the iPhone, we also got this email from Kevin that I thought was interesting. Ben has talked about the real decrease of iPhone cost over time and tied it to Apple's services. It's true that increasing service revenue lowers the optimal price for Apple to charge, but I don't think that's the primary driver. Apple is competing about the product most like the ones they just released, the old version you already own. They keep the price of the new. one low to drive replacing the old. In most cases, upgrading won't increase Apple services revenue. And I suspect a large portion of sales are replacements. Do you have any thoughts on that theory? Yeah. I mean, that's definitely the case. I mean, the way that sort of good enough often manifests is in elongating sort of upgrade cycles, right? You know, the, you know, eventually your battery does wear down. You can get it replaced, but it's sort of a good motivation to sort of get a new one. But I will say, you know, I felt this, as I mentioned, I felt this very tangibly over the last month or two, as I've been using an iPhone 13 and it's been fine.

Like, like I, I've had an iPhone 15 in hand. I just haven't been bothered to go through the hassle of sort of transferring a new phone, particularly, you know, there's a new one coming out soon enough. And yeah, there's no, there's no meaningful. The most annoying thing is the lightning. But I use MaxSafe almost everywhere anyway, especially when I'm back in Taiwan. So it's fine. And yeah, it's definitely the case. And it's interesting because I was thinking about why they don't have pricing power to raise their prices.

One theory is, all right, they're trying to keep prices low to kind of widen the funnel and broaden their addressable market. But also in terms of competition and why they may not have the pricing power, it's just that nobody really needs to buy these phones. And so if they make them too expensive, people who have iPhones will say, I don't really need to do it. this year. I'm going to wait a year or two. No, I think Kevin's right. And there's a bit about 999 for the pro in particular, which is sort of the Apple fan phone. I mean, of course you get the high end Apple phone, right? Why would you? Why would you not? Uh, 99 is definitely sort of a psychological barrier, right? You go to 1099. It's like, yeah. 1200. Do I really need it? This is a laptop. I'm not going to get crazy here. Yeah. No, exactly. So yeah, no, I think Kevin's exactly

right. That is, you know, particularly for the pro. Um, I think for the regular iPhone, this is the one that I does think drive sort of switching over time. And this is the one that sort of goes down in price. It stays on the market for years. You know, and so Apple getting this new phone out with 8 gigabytes of RAM at 799 means that in two years, it's going to be $5.99. And maybe it will be the case that this will actually stay on the market an extra year and they'll bring in another like a pro at $8.99 price. and they'll have four years of phone in the market or something like that. I don't know remains to be seen.

It's hard for me to ever let go of the concept of Apple having pricing power in terms of its products. Right. So we'll see. That's why it was, it sort of broke my brain because if I need a phone, I'm going to pay whatever Apple is charging. I don't need a phone right now. You know, you're the most lucrative career on Earth, which is a professional podcaster. There you go. Well, before we shift to the abstract portion of this discussion, one final question on the specifics of Apple's business. Ben C wrote in about the app store revenue. He said, I was thinking about the app store and why so many people have this intuition that Apple is in the wrong, but nobody except what about us has that intuition about PlayStation or Xbox. It crystallized for me when listening to this patent discussion, particularly when they got to the wireless technologies. Most wireless patent. are contributed to and then licensed from a frand pool in my opinion this is what we should be seeking

for ios and android these platforms are important enough that access to their apis libraries and distribution mechanisms should be required to be provided in an open way at a reasonable rate that rate can be debated and adjudicated but it is crucially significantly lower than what the free market would allow it's a good note from ben c we've mentioned the fran model on this podcast podcast before. Okay, note from Ben C. Okay. Well, look, my assumption is that it's only a matter of time before that's how the app store questions are resolved. I'm not sure whether it's an act of Congress or a court case, but that's where we're headed. Leaving that debate aside, hypothetically speaking, if that is where we end up, if a Fran-like solution cuts Apple's take rate from

30% to something like 5%. What would the strategic response be from Apple in that scenario? Well, no, I need, sorry, I need to take on a few assumptions in your question and in Ben's email. So number one, when it comes to PlayStation and Xbox, this is actually my view on the app store. Again, if I was sort of, you know, emperor of the world and could dictate it, is that Apple should be allowed, Apple should be allowed to treat games like consoles, games. They should be able to do 30% and limit purchases and whatever it is. I think it's a, to his point, it's not a societally important market. I love you gamers, but, but like, and I think

it's a market that has demonstrated abuse in the past and has risk for abuse in the future. And I don't mind Apple having sort of a firmer control and also being able to profit in the way that Microsoft and Sony do from, or Nintendo for that matter, from consoles. So I've always felt there, There should be a separation between how games are treated and how general apps are treated that are just sort of important for society to function. To that point, yes, these APIs are important, but to Fran specifically, I'm not sure I agree with the bit that it's significantly lower note. The free market would allow. That's not the point of Fran. The point of Fran is that anyone can get access to those patents and that the patent creators are fairly compensated.

There's no requirement in Fran that they get compensated under what it's worth. This is a totally wrong assumption. The amount that Apple pays in patents for an iPhone or anyone else is huge, like well into the triple digits. I don't know exactly what the numbers are, but this is also one of the flaws when it comes to evaluating how much the iPhone costs when you just look at physical components. There's a huge amount of licensing fees that go into it. I want to, I don't want to commit. to the triple digits, but it's a lot. It's more than you think. And this idea that you're going to get less because your friend is totally wrong. The whole goal is you want companies investing in this

and Fran should be a reward in a certain sense in that you are getting, making a lot of money by virtue of being part of a standard. The point is to have a standard. Fran is also not a government decree. It is sort of something that the industry does do. And it's a good example of how the free market can deliver good outcomes. Frand is a free market outcome. So there's just a lot of really flawed assumptions in your question and in this email, which is why I said it's an okay email. It's a good sort of prompt to sort of discuss these things. Yeah. Well, what I would push back on is that companies with patents that do become part of the standard, they have unlimited leverage to extract a huge portion of anyone's margin if they wanted to. It's not, it's not, you're getting the order of

operations long. Patents don't become. come a part of a standard unless they are delivered on friend. Yeah. So, so, so, so, so,

so, so, it's a, it's a, it's a fair and reasonable. What is it fair, fair and reasonable, something or other. Basically,

the, the, the, the price of being a part of the standard is agreeing to to friend. Yeah. And the idea there is anyone can walk up and can pay those patent fees. And then they can have access to the standard.

That's not dissimilar from the app store, right? Anyone can walk up and make an app and they can pay the fee. that Apple sort of imposes. I don't know. The more I think about it, I just don't think this is necessarily a good analogy because it's sort of really deeply embedded in this question that we have a government dictat of essential technology being delivered at low market rates. And that's just not what happens here. And it's not what we want to happen. The key thing about this is we're not talking about, like we're talking about ongoing innovation. Like you go back to cellular standards. we want to go from 1G to 2G to 3G to 4G to 5G to 6G to 7G. And I'm skipping all the nicknames for what they were LTE or Edge or whatever they were. We want 6G to come. And oh, by the way, we want 6G to not be dominated by Huawei because of Chinese sort of willingness to invent. Like if we took away the ability for a Qualcomm to make meaningful money from their patents,

what we end up with is a Huawei defined 6G. because they are motivated to spend the money to develop the patents for reasons that are beyond making money. We want companies to make money. And frankly, this is a real critique I do have about a lot of Apple critics, which is an underappreciation of the market and a sort of hostility to making money. So I would have a big problem with this, you know, Apple's take rate from 30 to 5 dictated by a government. Now, the pushback is how much innovation is Apple actually doing with the app store? Right. Right. And aren't they just riding along on the creation of the phone?

And look, Microsoft did fine for years and years by virtue of making Windows and they didn't charge a sort of fee. All of that is true and fair and legitimate. It's also why I've consistently supported some way to sideload apps. Like I think that's something that Android does right that Apple should have had. I don't mind all the warnings and all those sorts of. things there just should be a way to do it. And, you know, some sort of, like, the big problem with Apple's approach is just the lack of pressure valves.

Like, there's no sort of way to escape for things that are sort of edge cases and that don't make sense sort of under the model. But I do have a problem. Like, you should be able to to make money from your investment over time. And we want to spur more investment over time. Well, and they have made money. They're the most valuable company in the world. No, I just get it.

I just gave a long soliloically about, it's a surprise. how much money they're making from services, right? Yeah. And I also said that we were going to need the app stores as bait aside. Don't, don't, because I don't want angry emails. I have established my bona fides as in I was one of the very first people in the world to be talking about the app store and the issues that were there. I came out of the gate from Chicago in 2013 firing on this point.

So don't send me emails accusing me of being on sort of like an apple shill on this point. But that said, there is a lot of this discussion. that can go sort of too far in the other direction. And, you know, this gets back to the Apple point. And when you think about sort of we want Apple to, it's a good thing that Apple is still valued as sort of a growth company, that they do still have more freedom of movement in their guard, that they can sort of invest in sort of new and different things.

And, you know, that is an underappreciated upside of the app store and services, is Apple's not in a defensive crouch or a retreat like sort of Microsoft in sort of the, you know, was sort of once upon a time. Or there, you know, there's a more freedom of movement of possibilities. Now, do they abuse their position? Is the app store sort of make lots of business models not viable or possible? Is 30% actually the appropriate rate? Are apps essential enough to daily life that there probably should be some sort of restrictions or whatever?

on these points. Yes, I've argued all these points for years and years. I wish Apple would have long ago voluntarily recognized and admitted to that and changed some of their policies. Is the fact that they haven't going to result in regulation? Possibly, is it deserved? I guess so. Is that regulation going to go too far and start to break apart what makes Apple special, which is that integration? Yes. Look what's happening to you. It's a mess. It's a total mess. There's no world in which I would want to be under that jurisdiction. Like, you have an iPhone in EU. Like, congratulations.

Apple's new strategy prioritizing Apple intelligence, which you don't have access to because the DMA forbids a company from using data they've collected in one area to watch a new service. The whole point of Apple intelligence is to use the data you already have. It's literally illegal. Like, so is that a solution? Be careful what you wish for. Oh, wow.

It's a great conversation Ben just had with himself here. We've had it several times on the podcast. But yeah, no, I hear you. And it's just something that I thought was worth mentioning in a conversation about Apple's new reality here and the emphasis on services. Because on one hand, emphasizing the services business is an elegant business strategy given the realities of the smartphone market now. And it's a good example of Apple's foresight and honest self-assessment. And then on the other hand, if services revenue is going to be like a signature of the growth story going forward, that leaves Apple exposed to a much bigger downside in the medium term than relying on continual upgrades in the hardware market.

It does. And so that's not a new risk, but it is what it is. A big part of the service revenue is that Google deal, which is obviously sort of under threat. now, right? Like, there's a, there's a bit where it's very elegant to your point, how they've sort of transferred their growth story. But that growth story is under significant threat on two really important vectors, the Google vector and the, you know, the, the regulatory vector when it comes to the app store. Yeah. All right. Well, part two of the Apple story was just something that struck me this week. I mean, and it's probably because I'm coming to this space with fresh eyes.

So I've interacted with technology my entire life, but I don't think I've been thinking about it critically until the past two years podcasting with you. And over the last couple of years, I mean, iPhone sales have been mostly flat. It's all about services for Apple. And every Apple event has sort of felt like a chore. And I don't mind it because, like I said, on Monday, the iPhone is a perfect product. And it's not worth trying to reinvent what's already perfect just so you can impress Twitter. So I have no complaints, but it seemed like a lot of people did have complaints on Monday. Like, I never got to experience the Halcyon days of Steve Jobs in the theater and everything's stopping for each new Apple event.

But among the people who were there, I was struck by how underwhelmed and bummed out everybody seemed to be on Monday after the Apple event. So to that end, I'm just going to read two threads. I guess these are, do they call them threads? Two threads from threads. Yeah, exactly. Gruber, who you know and love on threads, the obvious truth is that we all, including Apple, miss Steve Jobs, and then Walt Mossberg, also on threads, quoted Gruber and said this, absolutely true. The post Steve Jobs Apple has been a phenomenal money-making machine and has had a few

notable product successes like AirPods and the Apple Watch, but it hasn't replicated the big game-changer product experience of the Jobs era. So I was just curious, as someone who's been around for a while, what's your reaction to that line of thinking? Like, how might Apple be different today if Steve Jobs were still part of the brain trust? I think it's actually a little unfair to Apple, to be totally honest. The problem here is if the iPhone never existed, the size and scale of, I mean, the iPad is hard is defying because it really is a big iPhone in many respects, but just like Apple Watch

and AirPods is incredible. Like these are incredible businesses. They just don't seem as incredible in the context of the greatest business of all time, which is the iPhone. And, you know, and people say, oh, it was so brave of Apple to watch the iPhone and make, you didn't need an iPod anymore. They killed their iPod business. Yeah, they killed their business with a device that costs twice as much than at higher margins.

Right. Like it's impressive that they did it, to be clear. You see companies that have trouble watching a better product because they have like a fiefdom inside that blocks it to protect their sort of business. They did kill the iPod. But just to be clear, they killed the iPod with a better product that was more profitable. So like, like, and the iPhone is the greatest product of all time. As I mentioned, it was because it's the thing about software is software you can differentiate endlessly. You can do whatever you want.

The problem with software is it's infinitely replicable. It's sort of economic value is zero, right? Hardware, it's easy to commoditize, which is bad. What's good, though, it's a physical device, which you can charge a lot of money for. The iPhone combines them, right? It has differentiated software on what could theoretically commoditizable hardware, and then it sells it at a huge premium, and it's done in astronomical numbers. No one ever thought, again, we go back a decade.

No one ever thought that Apple could have 50% or 30% worldwide or, over 50% in the U.S. sort of market share one company. They're like, no, not going to work. It has to be modular. No, Apple prove them all wrong. And has done so well raising prices to, to, from sort of business perspective, well delivering more features. Everyone talked about the iPhone, and this is honestly the biggest critique I would have on my article.

People were saying the iPhone is done with innovation like a decade ago. It has kept going, right? And I think the point of my article, and I'm not sure I was clear enough. on this is it's less that the iPhone can't differentiate as a product, more that can they differentiate within the iPhone line. Like the pro, the pro line feels a little dead to a certain extent, right? And all the differentiation is software driven going forward. And each generation, to Kevin's point, I mean, like 15 is it going to be really that different

from 16? Probably not because the performance is already at such a high level that there's only so much you can improve. The other beautiful thing with the iPhone is it wears out. You drop screen breaks. Battery goes bad, right? And it's such an essential product. You're going to immediately when it breaks.

You're going to go get a new one. You're not going to wait a week. You're not going to do research. You're just going to go to the store and get one because you need it. It's an incredible product. And so I think this does a disservice to what a great business Apple watch and AirPods have been by, and it's because it's being compared to the iPhone. And so I would say that that's my first sort of defense of Apple.

Number two is to the extent I agree, it's really about the Vision Pro in that like that is a product that seems to like the critique of the Apple Watch, even the early part part of the Apple Watch where, you know, they didn't know what it was. They had to figure it out. Oh, it's a health and fitness device. But maybe Steve Jobs would have helped them refine that sooner. He probably went to let them watch a $17,000 gold version. You know, it would have, Steve Jobs was an editor. Right. And I think actually the person that suffered the most from Steve Jobs leaving was Johnny Ive, who needed an editor.

I think, like, and the max wouldn't have gotten in the bad state they were, I think, if Jobs was around as they did sort of in the Med 2010s. And the Apple, the Vision Pro needs an editor. Should it be a $4,500 device? What could have been cut? What should have been cut? I think he probably would have enforced a lower price point. I think he would have given it a reason to. exists and critically he would have pulled together the company behind if they're going to launch

this it's going to be a whole company effort there's going to be content to watch there's going to be apps that are compelling there's going to be these bits and pieces it's not going to be this what it feels like this isolated project on the side where kind of lost budget control and also lost and had insufficient internal support and maybe jobs wouldn't have launched it at all it's it's possible I mean, so I think that's a great example of where he is definitely missed. But the other bit is, again, once you reach, once you launch the iPhone, just to go back to point one, what is better than that? And the way Apple has, to the last podcast point, the way they've diversified the models and the colors and shipping all over the world, I was complaining about bands, right? That whole bit about my confidence in buying an iPhone.

iPhone does have different models that have different bands and different supports, and they do have a dual-sim model in China that doesn't have ESIM, at least in Taiwan. It is both. There is a lot of all this complexity. And number one, that's really hard. Number two, Apple does it better than anybody else. It's very clear to me from like sort of the last week or two of sort of, again, looking at the Android space. It's really easy to idealize someone that's not there. Your counterfactual is always sort of this amazing world. And I didn't expect to come on this podcast. today, especially after writing as somewhat, it wasn't critical of Apple, but just sort of like an inflection point article of Apple. Realistic about where they are. Apple's, like, Tim Cook has done an incredible job. Like the, it really is true. And again, I have lots of critiques. I'm frustrated about the App Store for various reasons. But, but there's a lot of like really impressive things that have been done in that bit.

And I'm just not sure what people expect. Yeah. No, I mean, that was my reaction. is when you look at, first of all, in terms of the Vision Pro, if Steve's jobs were in charge for the Vision Pro launch, Steve Jobs would have been wearing a Vision Pro as they announced it. I'll never forget Tim Cook not wearing a Vision Pro. Still think that was incredibly lame, but it is what it is.

My reaction to some of the nostalgia this week, though, I feel like what people actually miss is not necessarily jobs, but just the sense of limitless possibility that existed 20 years. years ago or even 10 years ago because back then all these paradigm shifts were new and we were just entering them and all of it has happened now. I mean, this was like, it's hard to find a new life-altering piece of hardware because Apple already invented the life-altering piece of hardware and all our lives have been altered and trying to do something that's like even more groundbreaking. Like Huawei had the trifold smartphone unveiled this week, which did.

really impressed Twitter, but I don't know why that needs to exist. And the iPhone was a situation where, like, Steve Jobs thought of a product that needed to exist, the iPod, and then thought, that can be a phone and created a new market. It's hard to do that every 10 years. And so I can't really blame Apple for shifting into a different phase of its company's life cycle. And I don't think it would be all that different if jobs were still in charge because you can't just continue to reinvent the way society interacts with technology every 10 years. Yeah, I mean, this gets into like a broader, like an all-time philosophical debate, which is sort of like the great man versus like the tides of history or whatever is a great

man theory, I think it was called like versus like structural forces. And the answer to a lot of these philosophical debates is probably a little of calm, a little of column B. Like there are structural changes and forces that are happening, but it does take someone to sort of see and seize the moment and blaze the path. And to go to this point, like Apple is not necessarily first to a lot of this stuff, right?

Like you see, you go back to the Mac. Like the Mac, you know, Xerox Park had the first sort of GUI, right? But they, but jobs identified that and then brought it to market. in a compelling way.

And this is very underrated in terms of innovation. It's not the, we overrate the invention and underrate the commercialization and downstream commodization that actually brings it to the masses. And in the case of the Mac, Jobs' role and Apple's role was to the commercialization. It was Microsoft that had the sort of commoditization and sort of brought the GUI to everyone, right?

You fast forward to the iPod, there were mp3 players out there jobs was on stage in 2020 pitching i movie as the future you can bring your camera over and plug it in no 20 2000 sorry in 2000 just a real mess up by us there was one of those zero years yeah uh he brought he brought you you import film from your camera and you can edit it and you can print a DVD the future is movies that was like that was the real focus and and and and and and and And Jobs admitted in sort of an interview later, he's like, suddenly I looked up in 2020 and Napster is taking off and there's like these MP3 players and all these sort of things. We missed it. We missed the boat. And part of what made Jobs impressive wasn't that he invented MP3s or invented CDs. It's that he built a company that could pivot in a matter of weeks and months such that like six months. after that keynote, that Jobs himself would say a couple years later was totally misguided and missed where the world was going.

They had a new keynote where they announced a new product called iTunes. They went out and bought some software and they converted it. They made it into iTunes. The next month, one of their executives, John Rubinstein, was in Japan. He's getting a tour of Toshiba. They're like, oh, yeah, we made this little hard drive, but no one wants it. You know, all the laptop makers say, we don't need it that small and it's too slow. And he's like, I know what we can use it for.

Six months later, seven months later, it was January or February to September, Apple in months created the iPod. Like, it's incredible. It's unbelievable. And that wasn't the invention of the category, but it was the creation of an engine in Apple that could identify and harness and commercialize sort of a new opportunity. And in that case, reportedly over some of Jobs' objections, and Steve Jobs wasn't perfect. He saw the iPod as a way to differentiate the Mac. The Mac was his baby. That was Apple.

Oh, people will buy Mac so they can get iPods. And he had to be persuaded that, no, this is bigger than the Mac. This is a big deal. And we need to watch iTunes on Windows. iTunes on Windows is arguably the seminal event that led to the iPhone's dominance today. It broke Apple out of the Mac sort of mindset. And we, you know, it's so meaningful that when it's, one of the underrated parts of the initial iPhone announcement is Apple changed its name from Apple computer to Apple Inc. They weren't a PC company anymore.

They were, they were a company that served the broad range of sort of people's eyes. the iPod becomes huge and it's this huge thing. And then again, the iPhone comes along. It's a natural thing to do after the iPod. Yes, it was incredible. It was also rumored for years and years and years because obviously that's the next step for sort of Apple to do. And so you have this combination.

Now, the iPhone was incredible because instead of just building on top of the iPod, they had a brief bakeoff. Do we build on top of the iPod or do we come down from the Mac? And it was like, Tony, it was like Scott Forstall versus like Tony Fidel, I think. And they agreed, no, it needs to be a small Mac. Inspired decision completely changed the industry. Your phone was now a computer instead of a consumer electronics device. And that was great leadership.

That's your great man theory. Inventing a smartphone, that's structural forces. That was the obvious thing to sort of do. How that manifested was sort of the Steve Jobs effect. And what all these people that are pining for Steve Jobs, I think are missing is the structural component. What is the structural force that Apple is failing to capitalize on? The structural force right now is AI.

And so if you want to critique Apple, again, I think the most compelling critique of Apple right now is that their AI strategy makes a lot of sense. It's a great Wall Street story. We're going to specialize on the stuff we do good at and let everyone else spend hundreds of billions of dollars to create the AI that we will charge them to include on our phones and we'll charge their subscription prices or whatever it might be like whatever the open AI deal sort of ends up being. And actually that is signing up to be a passenger on the greatest structural change that is going to hit technology and not actually putting at risk, not taking all those billions of dollars that, you know, they're occupied fighting who they get to pay taxes on to, whether

be the EU or the U.S. And saying, no, we are going to spend hundreds of billions of dollars. What's the point of having an iPhone that generates so much surplus cash when we're going to sit on the sidelines of the greatest change that's impacting technology? If you want to critique Tim Cook, if you want to critique Apple, that's the angle. It's not that they didn't manifest something out of thin air when it comes to hardware and it's your electronics. Now, maybe you say Apple's not good at AI.

They should just be returning money to share her shareholders. That's fine then. Then the answer isn't Steve Jobs. The answer is actually there should be a new CEO that's even more committed to returning money to shareholders that gracefully winds down the company because it's just sort of an adjunct to AI. And I don't think anyone wants that either. Right. Well, and there's a possibility that AI is a feature and not a product and pouring hundreds of billions of dollars into a chase for some mythical AI product that will reshape the way society and. interacts with technology.

Maybe that product comes, but maybe it's 10 years from now or 15 years from now. And maybe what Steve Jobs would do if you were here is he would have, the whole thing with AI, the reason why I've argued that I think it's simultaneously transformative and also overrated in the short term is because it's so different. It's such a different way to approach things that it's like the internet. Actually,

the more transformative something is the longer it takes to productize at scale, because it just takes people a long time to wrap their heads around it and how it works and what its limitations are and what its strengths are. And Jobs was really good at that. Maybe Steve Jobs would help us figure out the compelling. The other thing about Apple Intelligence, if you want to critique it, there's nothing original there. We're going to rewrite your email to have a nice tone, right?

We're going to like, like, like one of the funniest things in the, in the keynote presentation is they have, number one, the fact that Craig Federigi was in the presentation was actually for a close Apple Watcher. a big deal. He's never in these presentations because these presentations about hardware. He's the software guy. The fact he's there speaks to the fact that Apple's ongoing differentiation is software, which drives towards commoditization of their own devices, number one. But number two, there was this email in sort of the demo he did where they did a bunch of bullet points like

party at XYZ, RSVPFI, da, da, da, da, and then they showed how Apple intelligence can make it into a nice, like make it into nice pros. And my thought was, I thought the bull points were way better. I don't want to parse through this. Yeah. I want an AI that takes long pros and reduce the bull points. And maybe Apple intelligence can really sort of be an obrose here where someone can take their bullet points.

They can transform it into pros that no one wants to read. And then your iPhone can take the pros and reduce it to bullet points so you can summarize it. That's kind of like what's being, what's being visualized here. We could use a product visionary for AI. Steve Jobs, Steve Jobs foresaw this. There's an amazing sort of quip that's been floating around about Steve Jobs talking about this device, how computers in the long run are going to be these sort of answer machines. And his description sounds a lot like what sort of chat GPT is today.

And maybe he actually, I think undoubtedly he would have incredible sort of views and ideas of what this would sort of look like. I don't want to shortchange Apple's foresight for the current era of AI. Like I actually think Apple intelligence correctly identifies the. leverage point in the AI value chain over the next decade. Yeah. For the next five years. Okay, for the next five years, the company that controls the information has access to your. That's true.

It moves pretty quickly. But I don't think that they have played this horribly, which was a narrative early on as AI exploded and chat GPT took over the world is what has Apple been doing? Oh, no, I don't think they played horrible either. Yeah, and I think we, from the beginning, or at least, I don't know we were doing sharp tack back then. I wrote way back when Chatsypd came out that Apple's well positioned here, at least in the short-term term. And I think they've played it, they've played it appropriately. They're also not investing in pursuing sort of, you know.

But that might be the right decision. Like I don't look at Apple as like a Boeing analog here that's just fat and happy sitting on a pile of profits doing nothing. I think that their strategy in AI makes sense. for the short term. I agree. That's why I called them boomers. Like, they're settled nicely into their role. Yes. All right.

Final item. Also, Steve Jobs, if his greatest skill was editing, Steve Jobs, if he were still in charge at Apple, would not allow that event on Monday to go 98 minutes. If you're not announcing anything exciting and still keeping everybody sitting there, not great. Final item from the Apple event. I won the group chat prediction.

contest. I will claim my being right points here on the podcast. You talked about that contest on dithering. Our colleague Dumbin comes up with 10 questions before every Apple event. It's one of my favorite things he does. He polls our tech group chat to see who has the best predictions. And I tied for first with our mutual friend Eric. So I'm happy with myself. What I felt most confident about was the final question that Duman had, which was Will Brad Pitt and George Clooney a appear at the event. Do you want to know why I was the only person who said they will not appear at the iPhone event on my day?

And by the way, to be clear, we were saying even a clip of the upcoming movie would qualify as appearing. And there wasn't even that. So why were you so confident? Well, um, my logic on voting no was that Apple wants to be taken seriously as a studio. So they wouldn't relegate Hollywood stars to hawking iPhones. And they wouldn't try to sort of confuse distinct product lines there. and also that Brad Pitt and George Clooney do ads abroad, but in America, they're movie stars.

And I would have been surprised if either one of those guys could be associated with that about. No, it's a good point. It's a good point. Yeah, I like that second explanation. It fits what I want to believe about George Clooney and Brad Pitt. Exactly. Apple TV also has a long history of inexplicably refusing to market the movie content they spend billions of dollars on. so I'm glad they stayed consistent.

On that note, Ben, another Apple event in the books, and we will come back for Mailbag Monday in a couple days. Any plans for this weekend? I need to recover after my monologue there. I kind of went off the deep end in a way. I haven't in a long time. But it was nice and comprehensive. I apologize for that.

I'm recovering from the hello at the beginning of the show like 55 minutes ago. We're just we're going to rest up this weekend. We're to come back strong on Monday. Yes. That's right. We'll keep it rolling. Continue to send questions. Email at sharp tech.fm. Ben, I will talk to you soon.

Talk to you later.