Amazon, Whole Foods, and the Shopping Experience

There's already been a lot written about Amazon's offer to buy Whole Foods, and what it means for the retail industry. The LA Times says it's all about home delivery of groceries (link) and the NY Times focused on efficiency (link). Ben Thompson wrote an excellent analysis pointing out the logistical advantages for Amazon of buying a food distribution network along with the stores that give it critical mass (link). The article is worth reading if you haven't done so already.

I don't disagree with any of the above, but I find myself thinking back on a conversation I had recently with a former Amazon employee, and I wonder if there might not be a second motivation for the purchase, focused on what Amazon can learn from Whole Foods rather than what the company does for Amazon's infrastructure. The former Amazonian I spoke with was very careful not to discuss company confidential information, but he was happy to talk about the company's philosophy, and he said Amazon is often misunderstood.

I started off our conversation praising Amazon for its outstanding logistics, the relentless focus on efficiency that drives its dominance. The former employee gave me a funny look and said that's exactly what people don't understand about Amazon. The company's senior management isn't focused first and foremost on logistics, he said. It's focused on customer experience: How do you solve customers' problems and how do you make them happy?

What the company is relentless about, he said, is its willingness to pick away at customer problems, running experiment after experiment to find new ways to satisfy people. That's the motivation behind many of Amazon's new products, he said. Kindle? An experiment in instant delivery of digital goods. Drones? Faster delivery of physical goods. The thread tying them together is that Amazon has realized instant gratification is a very powerful benefit, and anything that moves in that direction is worth exploring.*

Usually when the tech industry talks about customer experience we think of Apple, with its focus on design and elegance. The experience of using the product becomes the product itself. Amazon's customer experience is more transactional. Nobody I know would call the Amazon website elegant in the Apple sense. If Apple ran Amazon, there would be only a single product on the Amazon home page, but it would be presented so compellingly that you'd feel driven to buy it, and you'd feel good afterward because the mere act of owning it validated your taste and intelligence.

Amazon is more about efficiency as an experience: the way you feel when you can find what you want effortlessly and get it quickly. Viewed in that light, the Echo is an extension of that effortless experience.

So then, why buy Whole Foods? The grocery industry is under chronic financial stress. Amazon could have its pick of grocery chains and logistics centers. Why pick this particular one?

I got an interesting perspective on Amazon from the speakers at Etail West, a big retail conference I attended last year. Retail and ecommerce companies get together at the conference, drink heavily, brag about their accomplishments and complain about their challenges. One of the central topics is always Amazon and what to do about it.

To many retailers, Amazon is the grim reaper: unstoppable, lurking in the background and preparing to harvest them all. For a long time retailers hoped to learn from Amazon and become as efficient as it is, to compete toe-to-toe on price. Lately many seem to be giving up on that, realizing that they'll never match Amazon's scale and efficiency. "Amazon is an algorithm," one retailer said. "You can't win by being a better algorithm than they are."

Instead, many of them are focusing on the customer relationship: Connect with people about their values and interests, give them a great in-store experience that reinforces that connection, and they'll buy from you even if it's not quite as cheap or convenient as buying from Amazon. At least that's the theory, and faced with extinction on the logistics front, that's what many retailers are trying to do.

Viewed in that light, what does Whole Foods bring to Amazon?

Whole Foods connects with its customers around values. Whole Foods has one of the best, most differentiated in-store experiences in all of retail. In many ways, Whole Foods is like the Apple of grocery shopping. It's everything that people say Amazon isn't.

Maybe the outcome of the purchase is that, as many critics predict, Whole Foods will become a soulless place where robots replace friendly clerks. Or maybe the culture clash will disrupt both companies, like a mini AOL/TimeWarner. In that case you'll eventually see Whole Foods dismembered and digested by Amazon, its stores closed down and its house brands just another line item in the Amazon store.

But what could Amazon learn from Whole Foods about in-store experience and connecting with customers around values? How much better can the Whole Foods experience become when paired with Amazon's instant gratification engine? And if Amazon can combine Whole Foods' sort of experience with Amazon's, how much more powerful will the resulting company be?

And what in the world could the other retailers do next?

__________
*I asked him what explains the Fire Phone. He grimaced and said he wasn't involved in that one, and besides it was designed by a team in California that didn't understand the Amazon way. I know some folks who close to that team, and they tell a different story that centers on a meddling Jeff Bezos who forced bad ideas into the product. But that's another story.


The Tech Industry and the Return of the Zero-Sum Game

Summary. In the tech industry we worship “disruption,” but to most people it’s a dirty word. In a world where insecurity and mistrust in institutions are on the rise, tech is increasingly out of step with the values of the public. This puts our companies at risk of hostile regulation and customer backlashes. We need to change our attitude and our behavior, or our industry may be seriously damaged in the years to come.


The situation: No more win-win.

Across many countries, and across the political spectrum, we are seeing a dramatic erosion in peoples' faith in win-win situations. Compared to the past couple of decades, there's less willingness to believe that the benefits of any change will outweigh the costs. Along with that, there's a general feeling of mistrust in institutions. Many people on both ends of the political spectrum believe the political and economic system is being gamed by insiders to the detriment of everyone else.

Those feelings have always been present in our culture to some extent, but today the feelings are very strong, and what's especially unusual is that fear of the future and mistrust in institutions are rising together. People are simultaneously afraid of change and unwilling to trust those who are supposed to protect them from its problems.

That's what gave us President Trump (link). People call him a businessman, but he actually practices a very particular type of business: He's a deal-maker from the real estate industry. If you've ever dealt with real estate developers (and I have) you know they live in a world dominated by zero-sum negotiations in which one side gains and the other one loses -- the taller your building gets, the more shade it casts on the neighbors. For one person to win, the other has to lose.

Mr. Trump is a perfect embodiment of the zero-sum attitude that's rising in society today. The attitude is showing up more and more frequently even in the supposedly-liberal press, but most of us in tech don't see it. We still believe in win-win situations. We have faith that the world will be better for the changes we create, and we expect that to be obvious to everyone else.

Silicon Valley is like a hothouse full of orchids in the middle of a blizzard. Warmed by our stock options and VC pitches, and insulated by the buzz of our fans on social media, we often fail to listen to the people out in the cold.

For at least a year I've seen a trend in the general press toward skeptical, if not downright hostile, coverage of leading tech companies. Airbnb and Uber/Lyft are prime examples. They're poster children for disruptive change, and increasingly I think the general press is covering the damage they cause far more than the benefits.

That's understandable. Among all the industries being disrupted at the moment, traditional journalism is one of the hardest hit. When reporters see their own careers threatened, can you really blame them when they show sympathy for other people in the same boat?

For example, in the Los Angeles Times, coverage of Uber and Lyft has focused very heavily on their damage to traditional taxi companies, with much less attention on their benefits for the average citizen.

An article in April 2016, headlined "Uber and Lyft have devastated L.A.'s taxi industry," (link) did a pretty thorough job of highlighting the economic pain being felt by taxi drivers in Los Angeles, but said next to nothing about the benefits of ride-hailing.

The taxi drivers' pain is real, and I don't want to dismiss it. But anyone who's lived in LA can tell you that taxi service there has always been dysfunctional: notoriously unreliable, slow, and expensive. If ever an industry deserved to be disrupted, the LA taxi industry is it.

Part of the challenge for the ride-hailing companies is that their benefits are very diffuse -- they make it a bit more convenient for lots of people to get around the city -- but the pain they cause is very localized and visible: Working class taxi drivers who can't make ends meet. Balanced coverage would talk about the costs and benefits of ride-hailing, and would explore ways to offset the pain for those who are on the losing side. But that balance is often missing.

A couple of other examples:

--A column in the NY Times detailed government efforts to regulate what it called the "frightful five:" Apple, Amazon, Facebook, Microsoft, and Google/Alphabet (link). The fact that the Times' tech columnist chose the word "frightful" to describe the nation's most successful consumer tech companies says a lot, but the column added to the problem by quoting academics who fear the companies' power. Did you know Amazon is about to destroy the nation-state? Dang! There was zero effort to describe the benefits those companies produce, or the consumer harm that could be caused by regulation of them.

--A ferocious column in the Guardian declared that the tech industry is destroying democracy (link)

--In a similar vein, a column in the NY Times credited tech with creating Donald Trump (link).

--This graphic on the front page of BBC.com summed it up nicely:


The most disturbing thing to me is that the articles are becoming more and more shrill as time goes on. This is creating a toxic atmosphere for technology companies. Our industry is all about the benefits of change. For us, "disruption" is a positive thing. We welcome competition, because we assume that when a company or industry is destroyed, the new one that replaces it will be even better.

Our attitude is out of sync with the rest of the world. Our optimism makes us sound callous and arrogant. When we preach the benefits of something new, many people are reluctant to believe us, and some search avidly for any potential downside. The next step will be for them to actively oppose us, as is already happening to Uber and Airbnb.

In other words, tech companies no longer get the benefit of the doubt. Instead, any disruption we cause is likely to be assumed guilty until proven innocent.


What to do: It's time to eat humble pie

Om Malik recently wrote a commentary in the New Yorker suggesting that we in tech need to get outside the latte bubble and talk with normal people (link). That's a great beginning, but there's a lot more we need to do:

First step: Think. We should take these criticisms to heart. As a start, it you haven't done so already, read the Guardian article I linked above and think about it. In my opinion, the author is mistaking a transition for a collapse, but the important thing is for you to decide what you think, and then for all of us to have a rational conversation about it.

That sort of sober, logical discussion is very hard to do when everyone's frightened and reacting emotionally. So we need to drain some of the emotion out of the discussion of tech:

Shut up about destroying things. The tech industry thrives on negative energy; we love to brag about the brain-dead products and  industries that we're going to destroy. It's an old habit we picked up from Steve Jobs, and it doesn't serve us well in the new era. That sort of talk needs to stop. The only person who thinks disruption is sexy is your VC, and the only place for discussing it is a private presentation to investors.

Don't be a jerk. The culture in many successful tech companies isn't exactly compassionate. We tend to compete hard and talk bluntly, and sometimes we celebrate companies that will do anything to win. That leads to arrogant exec comments in public and employee behavior that skirts the edges of legality. When everyone loved the tech industry, that sort of behavior was often forgiven. But today it's more likely to get a company permanently branded as untrustworthy, and therefore in need of regulation. And it hurts the rest of us because it puts the whole industry in a bad light.

Don't overpromise. Hype is another long-time tech industry tradition, born of our own enthusiasm for our products. We sell the vision we're trying to build rather than its implementation today. But in the current environment, that comes across as lying. Every time we do it, there's damage to not just the company that exaggerates, but to the trustability of the tech industry in general.

Case in point: the term "artificial intelligence," which our industry applies to a technology that, when you strip away all the hype, basically consists of high-speed pattern matching. Are there potential job losses created by that pattern matching? Yes indeed. But the same thing happened with every technology breakthrough since the steam engine. You'll need to make a really strong case that this time is any different from the others. So far I have yet to see that case. But the term "AI" makes regular people think that we're about to create malevolent super-intelligent Skynet robots that crush humanity underfoot. That's not possible within the practical planning horizon of anyone who's not a singularity honk – and if Moore's Law continues to decelerate, it might not be possible ever. Meanwhile, our language terrorizes people and interferes with the real, rational discussion we need to have about productivity vs. job loss.

If you want a simpler example, consider the damage done when Tesla named its driver assist feature "Autopilot." That term has a very specific meaning to the public, and Tesla didn't deliver on that meaning. Every time we do something like that, we say to the public (and government) that we can't be trusted and need to be regulated.

Speaking of regulations, we need to make friends in the government(s). As a small-government guy, I dream of a world where companies are free to innovate, and the market alone chooses winners and losers. We don't live in that world. Government regulation is a fact of life in modern society, and in the current atmosphere, the more we disrupt things, the more we're going to be regulated.

So we have two choices: We can either partner with government, and get regulations we can live with; or we can ignore government and get rolled. That doesn't mean we all need to turn into influence-buying pond scum. Engaging with the government means being up front with regulators about any problems you create, and being willing to engage with them on solutions. I know from personal experience that most government regulators mean well and are just trying to enforce the law. They usually don't have a deep understanding of tech, though. So getting to them early, being honest, and sharing information freely can help them understand the difference between reasonable and unreasonable regulation.

This takes time and commitment, a price that most tech companies, especially startups, are not willing to pay. This is a case where the investment community should step in. The safety of your investments depends on good relations with the right regulators. You should be cultivating contacts in the government (national and local), and you should be teaching your portfolio companies how to use them, just the same as you teach them how to do Facebook advertising or agile product development.

There's a separate issue of lobbying politicians (as opposed to regulators). Some industries have become so enmeshed in government that they see political influence-peddling as a primary means of competing (aerospace, telecom, etc). I am not suggesting that we join that group. The thing that motivates all politicians is getting re-elected. If you're not going to fund their election campaigns, the key to influencing them is to have a lot of public support. You don't have to make huge campaign contributions if you have a lot of customers who love you and will speak up for you. That brings us to the next issue...

Measure and document your benefits to society. It may be obvious to you that your company produces a net benefit to society, but you should always assume that it's not obvious to anyone else. The press will focus on easily found victims: the mom-and-pop retail store put out of business by an online competitor, rather than the benefits of lower prices for everyone else in society. It's your job to document and communicate the good you do for society, preferably with charismatic examples of happy customers you've helped. If you can't find those, you need to get a better marketing team, and in the meantime you should hire a consultant to do a good economic analysis of the your benefits to society as a whole.

Take responsibility for the problems you cause. If there is a group that's hurt by your disruption, be sympathetic to them. Can you do something to ease their transition? Are there ways society can help them? Get out in front of the problem and help to solve it. If nothing else, don't act in denial of the downside; instead, make clear that the upside is better.


When we've done all of this – when we've calmed the panic and taken responsibility for the messes we create – then we can start rationally crafting a system in which we're allowed to innovate because the world trusts that we won't be irresponsible about it. That probably sounds like a tall order, but really I don't think we have any other choice. It's possible the public mood will improve dramatically on its own in the near future, but I doubt it. Big public swings between pessimism and optimism tend to last a decade or two, longer than the lifetime of most tech companies. For safety's sake, we should view the current situation as permanent and adapt ourselves to it, rather than huddling in the greenhouse and hoping the storm will pass.


What do you think? Am I overstating the problem? Am I wrong to believe that innovation is generally a force for good? Does the tech industry need to change in other ways? I welcome your comments.

Why Trump Won: Fairness and Change

Donald Trump won the 2016 US presidential election because of two issues: Deep concerns about the fairness of American government, and an intense desire for change. That's a different story that we've heard from many commentators (link), but I'm confident in my opinion because I heard it directly from Trump voters. Below I'll share their voices with you, and tell you how I found them.

This post grew out of an experiment I ran at UserTesting (my employer). I wanted to see if our technology could be used to gather public opinion info. I was pleased with the results, and wanted to share them. At a time when most people are focused on talking, think of this post as an opportunity to listen, and maybe get a better idea of what the whole election meant.


Background. Like many people in Silicon Valley, I was surprised and worried by the recent election of Donald Trump. I didn't understand why so many of my fellow citizens would vote for someone who had such obvious personal flaws. There were plenty of explanations in print and online, but most of them came from the same people who predicted the election wrong. I didn't trust their analysis; I wanted to hear from Trump voters directly.

Fortunately, I had a way to do that. UserTesting runs a system to give companies fast user feedback on websites and apps. You come to us, describe the demographic you want and the tasks you want them to perform, and we recruit normal people to record themselves doing the task. The whole process is automated and extremely fast – you start getting videos back in as little as one to two hours.

I figured I could probably use the same system to run interviews with voters. Instead of testing a website or app, the participants would just answer written questions about the election.


What I learned. I reached out to Trump voters the day after the election, and within a few hours I had all the responses. As you'd expect, there were many different motivations, but I think two threads connected the Trump voters:

--They feel the system in the US is unfair, and is being exploited by people who cheat on the rules.

--They felt that Donald Trump, as an outsider, was the best bet to change the system. Hillary Clinton's long history in government worked against her with many of these voters, because it meant she was seen as a product of the system rather than a change agent.

Trump stood for change. Clinton stood for continuity. Change won.


Don't take my word for it. Below are recordings of the Trump voters, explaining the decision in their own words. First there's a sampler with highlights chosen by me, followed by the full recordings of each interview, so you can judge for yourself. A few notes:

--To protect the privacy of the participants, I did not record their faces, and I have removed any references to their location. All you'll get is a black screen and their voices.

--The participants came from all over the country, and range in age from their 20s to their 60s.

--There are nine recordings. Before anyone objects, I know that's not enough for a statistically significant sample. But statistically significant surveys failed us during the election; do you really want another one? These recordings are more like a focus group, except it was completed in hours instead of weeks, each interview was separate, and the questions were written. So there's no groupthink and no moderator bias. This sort of research won't tell you the exact percentage of people who hold a particular view, but it's excellent for understanding why they think as they do, which is what I wanted.

Here's my highlight reel of Trump voters talking about their choice:

Other issues: What's the mandate?  The full interviews are much richer than my summary, and I encourage you to listen to them. Here are some of the issues that stood out to me:

--The vote was a very difficult decision for some of them. I was humbled by the amount of thought they put into it.

--Some were motivated by intense distrust or hostility toward Hillary Clinton.

--Some were motivated by opposition to abortion.

--There was not a huge amount of hostility to immigration in and of itself. Some of the participants went out of their way to acknowledge the contribution of immigrants. What bothered many of them was illegal immigration, because that was viewed as cheating. Sometimes that was paired with concerns about citizens who cheat on government services. It's the fairness aspect that bothers them: "I'm working hard to make ends meet; it's unfair when others don't follow the rules."

--Although I didn't ask about it, several people mentioned health care costs. They said health insurance prices have gone up dramatically in the last few years, despite President Obama's reforms. In fact, some blamed him for the rise in premiums.

--There was a lot of desire for reconciliation with the part of the country that voted for Clinton. Some of the Trump voters went out of their way to say that they want more cooperation in the country, more equality, and less racial tension.

Overall, I think it's fair to say that the election was a mandate for dramatic change in the system and for increased fairness. That's especially vivid when you think how close Bernie Sanders, another advocate of change, came to the nomination on the Democratic side.

I don't think the election was necessarily a mandate for every other proposal that was floated during the election. In the recordings you'll even hear some Trump voters scoffing about the border wall, and saying they don't want Roe vs. Wade overturned.

I think the election result was a cry for help from people who thought Trump was worth the risk. As one woman put it: "I decided to go with Trump...because I thought maybe he could make a change and he could make a difference, and I am praying that I am right."

You're not the only one, sister.


Here are the full interviews:

What do you think? I'm going to take a chance and leave comments open. I'd love to hear your thoughts on the interviews and what they say to you. But please don't vent, and don't criticize the interview participants. They had the courage to share their thoughts candidly, and deserve to be treated with respect.

PS: Although UserTesting allowed me to do this research, I did it on my own time, because I wanted to understand the election, and I was curious to see if our tool could be used this way. I used personal time to edit the videos, which is why you're seeing this several weeks after the election.

PPS: If you're wondering why I put a political post on a technology blog, stay tuned. There is a connection, which I'll explain in future posts.

The Real Meaning of the Fire Phone

People have been asking my opinion of the new Amazon Fire Phone, but I’ve had a lot of trouble answering. My first reaction was overwhelmingly blah. I’ll be curious to try it, and maybe then I’ll feel better about it. But right now it seems to me like a bag of interesting features rather than a coherent product. (Quick, what do faux 3D imaging and a year of free mail order shipping have in common? Absolutely nothing.) Plus it’s available from only one mobile operator, and the pricing isn’t low enough to get anyone excited. I’m delighted anytime a major company tries to innovate, but I can’t imagine this phone having a huge impact on the market.

Many others are neutral to downright hostile. BGR wrote, “Amazon innovated in all the wrong places.” (link). And CNN said, “if you're happy with your iPhone 5s or Galaxy S5, there's no compelling reason to change” (link).

So why did Amazon build this product?  Ben Thompson made a good case that the phone is designed to strengthen Amazon’s relationship with its lucrative Prime customers (link). I’m sure that’s part of the motivation. But if that’s the only goal, wouldn’t you price the phone very low to grab more customers, the way you did Kindle? And as Ben himself noted, there are many other things you could do to more directly recruit Prime customers. For example, many of the Fire Phone apps could have been released separately for Android and iOS. Wouldn’t that be a better way to serve Prime customers? Rather than trying to rip people away from their iPhones and Galaxies, why not just co-opt them through some apps that run on their current phones? What Amazon’s doing is like selling your own line of sofas as a way to distribute slipcovers.

And so I go back to wondering why Amazon did it. Imagine you’re Jeff Bezos. You have a fairly stable relationship with Apple and many other phone companies at the moment; why turn yourself into their blood enemy for a product that that won’t move the needle in sales?

To me, the Fire Phone reeks of experiment. I think Amazon’s testing something, and the experiment is important enough to spend a ton of money and create a lot of competitive hostility. After thinking about it a lot and trying to look at the world through Amazon’s eyes, I think I can guess why the Fire Phone would be strategically important to Amazon. I believe it’s not about the phone market; it’s about the evolution of mobile commerce and the future of Amazon itself.

To explain why, I have to give a bit of background on mobile commerce. For online retailers, the single most frustrating thing about mobile technology, especially smartphones, is that it people using it don’t buy a lot of stuff. They’ll browse in your web store and use your shopping app, but when it comes time to buy they often don’t purchase. The industry rule of thumb is that a good commerce site on a personal computer will convert about 3% of shoppers to buyers (in other words, for every 100 online shoppers you make three sales). The conversion rate for smartphones is a third of that, about 1%.

In an industry that would kill to improve conversion by a tenth of a point, that drop from 3% to 1% is horrifying. Many commerce companies have spent years trying to fix it, and through incredible effort and careful experimentation it is indeed possible to increase the mobile conversion rate. In my day job at UserTesting that’s one of the things I help companies do. But it’s a slow process of incremental fixes, and in the meantime mobile web use is growing explosively. Here’s the nightmare scenario for an online retailer:

—What if the next generation of internet users moves to smartphones and wearables faster than we can figure out how to fix mobile shopping?

—What if, as people move to mobile, the conversion rate for our whole business drops from 3% to 1%?

—And most disturbing for a category leader like Amazon, what if the low conversion rate on mobile is a sign that the online store itself is not a good fit for smartphones? What if some new mobile technology or app makes online shopping obsolete, just as online stores have been making traditional retail stores obsolete? What if Amazon itself is the next big tech dinosaur?

Don’t laugh. Platform transitions in tech usually make the old category leaders obsolete. Read about Lotus Development or Digital Equipment Corporation if you don’t believe it.

That existential threat is the kind of thing I’d expect Jeff Bezos to worry about. It’s a huge change that comes from an unexpected direction and could cut the heart out of his business. What’s worse, by the time the threat becomes obvious it’ll probably be too late to respond to it.

So the time to act is now. Amazon needs to dive into mobile and figure out what the shopping experience would look like if you built it into a phone from the ground up.

If that’s Amazon’s motivation, then the Fire Phone is really all about Firefly, Amazon’s instant-buying technology. I think the question being tested is whether you can completely replace a web store with a properly configured phone. What if, instead of going to an online store to buy something, your phone itself became the store? What if, instead of searching for the thing you want to buy, you could just take a picture of it, or scan its barcode, or say its name? 

Amazon everywhere. Futurist Paul Saffo put it this way: “Firefly allows Amazon to invade every store in every mall on the planet and turn it into a de facto showroom for Amazon” (link). I’d go even further. I’d say Firefly is an effort to turn the entire world into an Amazon store.

If Amazon makes that phone first, it takes another big chunk out of Walmart and Target and eBay and every other retailer out there, physical or virtual. If someone else makes it first, Amazon itself is in mortal danger.

I think that’s why Amazon had to make a phone. It needs to test and tune the integration of mobile hardware and software in the purchasing process, and that would not be possible on someone else’s phone. It also doesn’t want to share the data it’ll collect with any other phone vendor (especially not one allied with Google), since that could be the key to the future of the whole company. 

From this perspective, the rest of the Fire Phone announcement makes more sense. You need to toss in a few sexy features, like the semi-3D screen, to attract some users. The price doesn’t have to be low because Amazon doesn’t want to sell a gazillion phones. One carrier in one country is enough because Amazon’s not pushing for world domination yet. It needs just enough users to give it a robust experimental base. Then it’ll observe, and it’ll learn, and it’ll tweak the experiment, and it’ll learn some more.

And then, when it gets the formula right, we’ll see the real Amazon phone. I’d expect it to be more aggressively priced and much more broadly available. I wouldn’t be surprised to see Amazon also release Firefly apps for other phones at the same time. By that point Amazon’s priority won’t be secrecy, it’ll be rapid domination.

Or maybe the experiment will fail. Maybe Amazon will learn that there is no magic way to turn a smartphone into a store. In that case it’ll quietly make the phone disappear, write off the losses, and move on to other priorities. Hey, it’s just money, and we all know how Jeff Bezos feels about that.


What it means for the rest of us

Do you remember back when Google was just getting started in smartphones, and there was widespread speculation that Google would give away a phone with free wireless service? The idea was that the things Google would learn from the user were worth more than the cost of a phone service plan. That idea faded away as Google focused on co-opting rather than destroying the mobile industry, and as it realized that it couldn’t make enough money from phone users to pay for the service.

It might be time to revisit that scenario. If anyone can figure out how to make a free phone pay for itself, it would probably be Amazon. Even if it can’t give away a phone for free, it might be able to offer steep discounts, putting the rest of the phone industry at a huge disadvantage. If you’re Google or Apple, you don’t have the sort of retail back end that Amazon does, so you can’t directly match that strategy (although Google might try). A better option is to team up with the other companies threatened by Firefly. Perhaps you create a Firefly-equivalent app and open it to connectivity with anyone else’s online store in exchange for some sort of revenue sharing.

That approach requires heavy skills in alliance building. Apple might be able to pull it off, but they tend to work exclusively with a small number of subservient partners. Google could try for a broad alliance -- it likes to do everything big -- but I doubt it has the focus and consistency to create a lasting partnership of equals with large numbers of companies. (In that vein, it’s meaningful that Google started on a path similar to Firefly back in 2010 with Google Goggles, but killed the product a few weeks before the Fire Phone announcement because it was “a fun feature, but also a feature of no clear use to too many people” link).

So Amazon’s potential strategy plays to the weaknesses of its biggest competitors.

I wonder if Apple might be willing to build a long-term partnership with Amazon, instead of competing against it. In addition to cooperating on mobile commerce, Amazon could help Apple with its portfolio of online services, a constant weakness of the company. Steve Jobs would not have done it; I think Tim Cook might.

If you’re an e-commerce company, you should investigate the Firefly APIs. It looks like you can plug into the Firefly system to make your own offers when a user scans an object. You’ll still need to convince users to install your plugin, but at least this will give you options. Besides, you need to learn how this new shopping paradigm works.

If you’re a bricks-and-mortar retailer, I think you shouldn’t waste time worrying about people using your store as a showroom for Amazon. You can’t stop that anyway. Instead, look at how you can enhance the shopping experience by embracing smartphones. To give one example, what if every product in your store had a QR code that took a smartphone user to your page for that product, with additional information, FAQs, and special offers? I’d love to have that in one of the box box retail stores where you can never find a sales rep. You’d enhance the shopping experience and maybe intercept shoppers before they turn to Amazon. Plus you’d get data on what people actually do inside your store.

I’m kind of surprised that Apple and Google haven’t already built a QR scanning app into their mobile platforms. It’d be a logical way to partner with retailers and get leverage against Amazon.

If you’re another mobile phone vendor, such as Samsung, you should talk with Amazon about integrating Firefly into your phones in exchange for a cut of the revenue. Better to embrace the company now than to risk competing against a heavily-subsidized Amazon phone in the future.

And for anybody who deals with mobile, the Fire Phone is a reminder that we’re just getting started. Although we talk of smartphones as a maturing market, we’re barely beginning to learn how mobile devices will change our lives. We stand in the foothills of the Himalayas. The biggest mobile opportunities, and the biggest disruptions to today’s businesses, are still ahead of us.

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What Happened to the Surface Mini?

Well, that was disappointing.

Microsoft’s heavily-rumored mini-tablet (link) was a no-show at the Surface event this week. If this had been an Apple announcement, I’d just say the Internet got carried away with itself. But the source of the rumors was the very reliable Mary Jo Foley at ZDNet (link), who’s almost a house organ for Microsoft official leaks. So what happened?

It’s possible that Microsoft leaked the rumors deliberately in order to smoke out Foley’s sources, but I don’t think Microsoft would have put Qualcomm in the story if that were the case. Most likely the product was real, and the announcement was canceled just recently.

Bloomberg says Microsoft execs Stephen Elop and Satya Nadella lost confidence in the product and decided to pull it at the last minute (link). That would be a typical move for a new management team – you always look to kill a few of your predecessor’s projects to put your own stamp on the organization. The reasoning that Bloomberg gave didn’t make sense, though. The report says the mini-tablet was canceled because it didn’t have enough differentiation. A tablet optimized for note-taking and equipped with a stylus would have been heavily differentiated, so that doesn’t wash.

More believable would be if the company is leery of launching any new product that depends on Windows RT, the ARM-based version of Windows that can’t run normal Windows apps. RT has failed to achieve significant momentum in the market, and I could see Elop and Nadella being very cautious about risking another RT-based product flop. More prudent to pull it now, ship the Intel-based jumbo Surface tablet, and do a minitablet later, if at all, based on Windows Phone. The jumbo product won’t change the world, but at least it won’t embarrass Microsoft.

If that was the call, it’s a prudent decision that totally misreads the market for mobile devices. RT was a bad choice for full-sized Surface tablets because they are too close in price and size to notebooks. No Windows user wants a notebook that won’t run Windows apps. But a minitablet could have been sold as an information appliance, for which full Windows app compatibility is much less important.

This situation illustrates why the tech industry has so much trouble creating truly new device categories. Small startups have trouble scraping together the money necessary to do a really different product. Doing it right often takes on the order of $20 million, more than you can easily raise from VCs or Kickstarter. Big companies have that sort of money, but they’re usually risk averse and would rather stick to established categories of product. Which is what Microsoft just did.

Ah well, the net impact is that Microsoft has now whiffed twice on the minitablet market, once with the twin-screen Courier product and now Surface mini. I wonder if they’ll get a third chance.

I’ll also be interested to see what the last-minute cancellation costs Microsoft. If they were close to launching, there will be parts and manufacturing contracts with big cancellation fees. Presumably Nadella will be doing some sort of restructuring of the company in the near future – new CEOs always do – and the writedown, if any, can be buried in that.

Meanwhile, someone at Microsoft is probably sitting on a roomful of Surface Mini prototypes that are headed to a shredder. I have one humble request: Could you please slip one of them to me?