Why the Cloud and Privacy Put Apple at a Structural Disadvantage
Ambient Computing: Data is king as devices get abstracted-away
In response to a lot of reader feedback, I wanted to consolidate some of my analyses into this one piece, because these observations are fundamental to my framework for understanding the immediate future of tech…
Charles Wiltgen illuminated exactly why I harp on Apple’s iCloud as an Achilles Heel: “CPU design”, “AI”, and other random buzzwords of the future are not as relevant to the next wave as are cloud services. After all, ambient computing runs on the cloud; and that’s about data, not devices…
First, Moore’s Law has officially ended, so the path to exponential tech progress is no longer predicated on increasing the efficiency of transistors; the path is now predicated on increasing the scale of the cloud.
That dove-tails neatly with hardware’s inertia: when you shrink the form-factor, remove the screen, go hands-free, and/or abstract-away the device entirely, cloud becomes even more important.
So, Charles inadvertently proved my point for me and answered Sceptical Meerkat’s question for him: Apple is at a structural disadvantage to Amazon and Google because cloud — being preeminent in the immediate future — is not a synergy or natural byproduct of its core business.
That’s my first important observation. Yes, scale does matter, and yes, Apple has many kinds of scale; Google also has scale; Amazon does too. The difference is that Apple doesn’t have competitive scale in the cloud department. That’s crucial, because Google/Amazon’s cloud scale creates a virtuous cycle: as their core businesses (search/ecommerce) grow, so don’t their own, operational cloud storage and computing needs. To wit, in a 2006 shareholder letter, essentially at the launch of AWS, Jeff Bezos himself described this virtuous cycle borne from Amazon’s own core business:
With AWS, we’re building a new business focused on a new customer set… software developers… We’re targeting broad needs universally faced by developers, such as storage and compute capacity — areas in which developers have asked for help, and in which we have deep expertise from scaling Amazon.com over the last twelve years. We’re well positioned to do it, it’s highly differentiated, and it can be a significant, financially attractive business over time.
(Interestingly, elsewhere in that letter, Bezos describes the same strategy — a “virtuous cycle borne from Amazon’s own core business” — leveraged with the launch of Fulfillment by Amazon.)
Accordingly, Amazon and Google reach ever-increasing cloud scale organically, which improves economies of scale; which allows them to lower pricing for 3rd party cloud users; which lowers the operating expense associated with their own core business’ cloud needs; which provides more cash flow for increasing cloud scale.
It doesn’t matter how much cash Apple has to ‘pay experts’ and ‘build whatever it needs’ to compete in cloud from a standing-start. That’s a popular refrain. It doesn’t matter because Apple doesn’t have that virtuous cycle — its own business doesn’t benefit from cloud scale. As a successor to the now defunct Moore’s Law, this has been called “Bezos’ Law”:
The latest [cloud pricing] cuts make it clear there’s a new business model driving cloud that is every bit as exponential in growth — with order of magnitude improvements to pricing — as Moore’s Law has been to computing… Moore’s Law is “the observation that, over the history of computing hardware, the number of transistors on integrated circuits doubles approximately every two years.” I propose my own version, Bezos’s law. Named for Amazon CEO Jeff Bezos, [it’s] the observation that, over the history of cloud, a unit of computing power price is reduced by 50 percent approximately every three years.
In contrast to those accelerating economies of scale and operating leverage in the cloud, here is Apple’s business description:
“Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers…”
Apple sells hardware and devices; it’s not a data business like Google or Amazon. No matter how big Apple’s Services segment grows, it will never generate enough data (stock and flow) to catch-up with Google or Amazon — or even Microsoft Azure.
That brings me to my second important observation: Apple’s privacy policy is another structural disadvantage, because the company can’t use its data the same way competitors do. We can debate the altruism of privacy and user data (my cards are already on the table), but the fact that Apple is at competitive disadvantage is incontrovertible.
Finally, that’s why I praised Apple’s tactics with ARKit. Whether conscious or not, it’s an impressive attempt to stave-off the voice interface for which the data-intensity handcuffs Apple. Regardless, it’s unlikely to turn-the-tide on the nascent audio epoch. From “Apple’s HomePod: Threading a Needle”:
“With ARKit, Apple has accelerated the flywheel again, as it is wont to do historically. Not only can augmented reality move the conversation away from voice toward the next next big thing, but it can also leverage Apple’s device advantage. It further warrants that $2,000 buy-in and tries to assure that screens still have a place in a screenless epoch. But, it doesn’t change the fact that audio is the next big thing. Like mp3’s beating video to the punch a generation ago, culminating with iTunes’ proliferation, we’re just not equipped for a visual-first experience yet today. Audio already has the pieces in place to enable a more frictionless experience; Google Glass, Snap Spectacles, and iPhones aren’t sufficiently simple vehicles for video delivery.”
Since we’re talking about “the next big thing”…
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