Author: Carl Schlachte

When you are as big as Apple only certain markets work because real growth must come in staggeringly huge increments. Only platforms matter—not technologies—because platforms become ecosystems; properly nurtured, they are self sustaining. Witness the iPhone: a radio, a screen, and some processing handed over to app developers becomes a game box, a newsreader, a mail client, an ATM…

Have you ever wondered how a watch was so-named in the first place? When did carrying a timepiece become “pocket watch” or “wristwatch”? The term watch is believed to have come from the Old English word “woecce”, meaning quite literally, “watchman”—it was how the town watchman kept track of his shift. Watches as timepieces were meant to evoke keeping an “eye” on the the town or the camp; guarding against unseen enemies. When it was your turn to be “on guard” you were posted to the watch for a certain period of time. That period of time was measured by the sun, the moon, then a clock tower and eventually in the 19th century, a device on our wrists. The history here is important because it was the function (watching) that derived the form (portable timekeeping) The simple act of telling time, became a platform on which the applications around timekeeping could be implemented. Measuring time was a way of coordinating remote events, calendaring, traveling, a scientific instrument, a navigation tool, and even a weapon of war. You can run a lot of apps on a timepiece.

While everyone has been focused on potential iWatch news: curved screens, iBeacon, Burberry, medical device hires and trademarking of names like iWatch, Apple has been busy building its next ecosystem. Apple picked your wrist because the last two hundred years of market research showed that many of us were willing to put a scientific instrument there. After that it has been an engineering effort to find out just how many useful sensors Apple’s engineers could cram into the space a human wrist afforded without making the wearer look like a dork. Apple jumped with glee when Samsung did huge amounts of public research for them for free with a Galaxy Gear Watch. Apple has seen just about everything that is likely to be a contender and all the competitors are standing around and well… watching.

To build an ecosystem, Apple is going after sensor density on your wrist as a way of truly keeping “watch”. If they are building this thing called an “iWatch” then they are going to gather data about you from your wrist and let a developer community write apps to monetize that dataset. Apple will provide the platform and developers will provide the usability. Apple will take their usual cut. You can bet iWatches will have cutesy “change the clock face” functionality, or text message alerts, but those apps will be sitting over a dozen unseen sensors buried in a liquid metal bezel, looking out from underneath a scratch-resistant sapphire face. Apple will hand out developer tools and a set of APIs that enable the making of medical diagnostic apps a breeze. Apple will have thought through how iWatch data is synchronized and secure; they’ll have modeled app pricing in the forthcoming “iWatch store” and have Jony Ive designed interchangeable watch bands at the ready. Apple will have considered third party peripherals based on protocols on which they intend to collect royalties. Importantly Apple will have decided than an iWatch requires an M7 motion coprocessor in your iPhone. This M7 requirement will force a mini upgrade cycle in iPhones for buyers of iWatches who are “stuck” on an iPhone 4. Ecosystems feed themselves after awhile.

My guess is that if such a device exists Apple will shy away from true “FDA approved” medical apps themselves because liability is a concern. Apple does not want to be paying out in a lawsuit for Uncle Don’s diabetic coma if an app fails to perform for some reason; they will want to punt this problem to the app developers. You thought all those hires they’ve been making with medical device expertise were for apps they were developing themselves? Probably not. Those well paid doctors are Apple’s new medical app evangelism team ready to help you develop your app. That shiny new set of devtools from Apple will have a shiny new indemnity clause in the shrink wrap agreement, so read it closely!

Because it’s a platform, Apple will likely announce it in the spring and tell everyone in the meantime that the iWatch is formally shipping “at the end of the summer”. Tim Cook will show a couple of in-house developed apps to get the creative juices flowing. Mark Parker, Nike’s CEO, will be on stage to demo Nike’s iWatch fitness app, which Tim Cook will gush over being “super excited” to use. Phil Schiller will breathlessly announce that the developer kit is shipping now! Eight hours later Apple will announce over twitter a mind-boggling number of dev kit downloads, and the race will be on. Will Apple make money off of an iWatch? Sure. Will they make a killing off the ecosystem around it? You can bet your life on it.

It’s a platform right? Lets get a jump on what could happen on the wrist that will make this the next must have gadget from Apple. Put in your suggestions and votes in the comments section and we’ll post a follow up “Top 10 Requested iWatch Apps” next week. Here are mine:

1. AppleTV remote control: I can waive my arm around like a wii remote and control my TV.
2. [insert your favorite] counter: steps, heartbeats…
3. Proximity sensor to my iDevice: if I get too far away from my iPad, my watch beeps and buzzes.
4. Configuration device: any iDevice I touch, knows my passwords, wifi settings etc. (remember they’re stored in the cloud not the watch, the watch is just verifying me).
5. Child alarm: I buy one for my kids so I know where they are in the mall—look for the ability to link more than one iWatch to an iPhone.
6. Parent Watch: my elderly parent gets one. I know when she’s up, if she’s getting her exercise, if she’s running a fever, if she’s taking her heart meds…
7. Credit card: with iBeacon and my phone in my pocket I only need to wave a watch at a pay station…
8. Heart attack warning: need I say more?
9. Glucose monitor
10. 911 emergency beacon with vital stats at the ready when the paramedics show up (if not already there via a phone upload)
11. Bonus app: Flappy Third. An iPhone game in which a poorly rendered 2D style bird has a broken wing. By flapping your iWatch enabled arm up and down you can help the injured bird fly and avoid pipes. Insanely difficult to play and you look creepy playing it in an airport.

It’s that time of year when everyone likes to compile a “Best Of” list. Having sat through so many meetings here in the center of the universe known as “Silicon Valley”, I’m offering my Top 10 Silicon Valley Business Memes That Must End for 2013. It is my fervent hope we can squash these sometime during 2014.

1. Compute terminology can substitute for normal words…
We do not “reboot” businesses, plans, conversations, or strategies. Difficult fellow human beings are not “no-ops”. Butting in and asking for attention is not a “priority interrupt”. I can keep going and so can you. In the name of decent, normal conversation, I’m asking that we please stop trying to de-humanize human things. Contrary to popular belief, employing this meme does not make us look “technical”. Using the word “meme” however is still cool.

2. Silicon Valley works well because it is a meritocracy…
No it’s not. We all enjoy telling each other this one out here because it makes us feel as if we are making rational business decisions on something other than influence and connection. Silicon Valley depends on networking. It concentrates a lot of skill and talent in a fairly small area and leavens the entire mixture with liberal amounts of cash. We seem to feel that it is a dirty secret that it is not what you know but who you know. That’s not a bad thing or even wrong, it just is.

3. Outrage Expressed on social media is action…
Unbelievably, despite whatever outrage we are feeling about whatever subject expressing it on social media is not going to fix it. Just because it has been expressed in a semi-public forum is not the action-equivalent of doing something. Yes, we linked to an article that proves our point, yes, my hand-picked friends might even be outraged right along with me. That is why they’re my friends after all! No, I didn’t actually “do” anything in this process. In 2014 if we are outraged, let’s actually do something about it in more than 140 characters or “like” buttons.

4. We’re getting a 10x return on our investment!
Come on, we know we’re not! All us bright people out here chasing 10x’s on our initial investment–statistically we know there aren’t that many to be had. In fact the actual number of companies that get this return are vanishingly small. Our limited partners are actually going to be much more impressed with actual returns when an exit occurs rather than excuses about why that hopeful 10x flamed out. If you’re an entrepreneur and you have tried to figure out how to make your pitch look like 10x you know the drill. Please stop. Let’s make 2014 the year we build great businesses with lasting value that further the common good. Let’s have that be enough.

5. Employee Buses
All the haters voting against tax increases to support mass transit, showing up to hate buses for the elite “knowledge worker” to get to work and unclog our highways a little bit, please check your irony meter at the door. Bus drivers parking where you don’t belong: please make those knowledge workers walk a little further. BART administrators and workers: repeated strikes are not only not helping, but there is a real danger of a “pox on both your houses” becoming the way we all feel. Can’t we all just get along? Traffic’s bad enough.

6. SoMoLo
Yes there is some obtuse linkage between Social, Mobile and Local, but not as an investment category. There is no unicorn here. While everyone tries to come up with some kind of grand unification theory around the so-called category, time is wasting for hundreds of little companies with great ideas. Big kudos to the person who dreamed up the name though–it actually makes it look like there’s a grand strategy in there somewhere.

7. We can hide the poor, or at least teach them how to code…
There seems to be a persistent belief that the poor should not be seen or heard and that means they don’t exist. Or that “teaching them to fish” means developing and iPhone app. Please see meme #3 and spare us the Darwinian (Malthusian?) social theories. Why not just do the right thing in 2014 instead? Let’s head over to Glide Memorial and put on an apron; refrain from taking pictures when we’re there, and post absolutely nothing to Twitter about the experience. No one will even know we did it! The poor (whom we will always have with us) will be fed and that’s all that really matters.

8. Food is rational investment thesis…
No it’s not. Call any Bay Area CPA and ask them the silly ways smart people waste good money. Right after they tell you “open a winery” they’ll probably add: “start a restaurant”. Yet we all do after some point and most, if not all of us, lose our shirts in the process. Just because we have come up with some way to tie a smartphone app to our kitchen does not make this venture capital worthy. Let’s make a New Year’s resolution to not make a business plan around food.

9. “Lean” anything must mean it is good for a business…
I love this one for its creativity. It combines humanity’s love of dieting fads with how to run a business. We business people just eat this stuff up (see how easy this is?). Waste looks like fat, and cutting down trims our waste-line (get it?). Lean-ness leaves us with muscle and bone and we are strong and growing. Sure, sure, we get it, but enough already. In 2014 I’m going to start my own meme called “healthy fat”. You see, startups are really like babies and babies actually need a lot of healthy fat to grow quickly… hey wait! If I turn this into a restaurant and add an iPhone app… instant funding!

10. Personal Branding
I don’t know if this started out here in San Francisco or not, but it sure feels like it did. Humans are not brands, nor should they ever be. It’s bad enough that half the clothing I wear has to show some type of logo, but now I have to make myself into a brand too? This is what we’re teaching our next generation of entrepreneurs? Be your own brand? Really? How about we focus on making ourselves into better people and leave the branding to companies and cattle in 2014?

Every strategic plan is an opportunity to kill our company and have it be born anew. This is a necessary thing and a good thing, but of course it does not come without fear. Do not miss the opportunity to kill your company or division or team or idea. I mean it. Look to kill your company as soon as you can. You can thank me later.

When I was younger and fresh out of school working for a big firm, the single task I dreaded the most was the once yearly “five year strategic plan”. Every year we had to review our business and fill out forms and compile data and turn in a plan that looked cautiously, five years into the future. I was never sure exactly what these plans did because I never saw any change that was directly connected to the planning we were doing. After several years of this routine a few friends and I made The Bet. We were older, more jaded and had loftier positions. By that time we were assembling the inputs from our respective teams and placing the plans into special sealed envelopes destined for headquarters. Now, in a bar somewhere in New York, we had convinced ourselves pint by steady pint that, unbelievably, no one was actually reading our opus magnums. Such was the foundation of The Bet.

The Bet

Each of us was to take a $20 bill and staple the greenback to the fifth page of our plan. Our idea was that if someone from headquarters asked about the money stapled to page five, we’d at least have some confirmation that a human being had read that far into our plan. Weeks later when I had not heard anything, curiosity got the better of me and I called my buddies from the night in the bar and checked in with them. True to form, I was the only one who had actually gone through with it. I spent the next several weeks scared to death that our stupid joke had likely torpedoed my bright future, and then promptly forgot about the whole thing. Some three years or so later I remembered and finagled my way into the room where the strategic plans were archived. There was my $20 as crisp as it was the day I sent it.

At many businesses people are engaged in the act of “strategic planning” because that is what it is: an act, a fiction. The strategic plan is the function that gets performed in the third calendar quarter of every year whereby we act like we are strategizing. But we miss the key point and value of the exercise when it is more a plan and less a strategy. The word “strategy” comes from the greek word “strategia” meaning office or command of a General–a leader commanding armies.

Perhaps we forget that death is a necessary part of any strategic planning because it seems to go against the grain of what we think a business should actually be doing. Dying? Businesses should be growing, vibrant, healthy places! Shouldn’t all our curves go up and to the right? Each quarter’s revenues are supposed to be higher than the last! Shouldn’t every powerpoint slide show some kind of slope rising to infinity? There is no room for death when all that gets rewarded is growth. And that is the problem. Intuitively we know that no curve in real life always goes “up and to the right”. Intuitively we know that real death is actually stalking our business every moment of every day either through complacency or a more aggressive competitor. [pullquote]Every great stride made by your fellow humans had death at its heels and this is acknowledged as a good thing[/pullquote]

No great General ever considered a war plan without also considering casualties. Certainly no General who loved and respected an army ever did a strategic plan that did not make the necessary deaths for the outcome actually worth something. Go further for moment though and try to think of any living process on planet earth that does not include death as part of its “strategic plan”. Foundational to Darwin’s theory on evolution is the necessary part death must play. Can you think of any serious, world changing human endeavor that does not include the possibility of death? Every great stride made by your fellow humans had death at its heels and this is acknowledged as a good thing. Why then would we ever consider any strategic plan that did not also include dying?

Death has not been altogether missed by the most successful businesses; they just don’t use the term “death”, instead preferring to use much more acceptable words like “fast failure” or “learn from our mistakes” or “cannibalization” or “planned obsolescence” or “transition plan”, or “succession planning”. The hot word these days is “pivot” meaning “our old plan wasn’t working so we have a new one”. This is all insecure justification for the reality: an old plan was killed and a new one was born. There are hundreds of ways of saying that something must die for success to occur, but perhaps it is our own human innate fear of death that prevents us from embracing “death” and facing it without fear.

Apple has death down to a science and has turned it into the world’s most successful business. Steve Jobs once said, “If you don’t cannibalize yourself, someone else will”. Cannibalization is the essence of death bringing new life in a business context. In Apple’s thinking, it is far better to kill and eat its own products with its own products than to have someone else do the killing to them. Their very survival is based on planned death.

Andy Grove, the former CEO of Intel is famous for making the decision that would kill a very profitable memory business in favor of an unproven semiconductor device called a microprocessor. He oversaw one of the largest increases in share price of a publicly traded company on the “death” of Intel’s cash cow memory products business. Perhaps it is not at all surprising that a Jewish boy growing up in a Nazi occupied Hungary, and surviving to watch dictators and regimes come and go would be so familiar with death that the death of a mere product line would seem a small thing. That experience led him to Intel and he likely saved one of America’s greatest companies as a result. Death is an excellent teacher.

Behind every great company like Intel or Apple there is a death and rebirth story, if not for the whole enterprise then a key division or product. It is a simple fact and it is not talked about enough. We have to wonder why. Why when everyone is looking for an edge, are we not looking at the only edge that matters?

Lessons Learned

Having been a part of so many deaths during my business career, I am sometimes privileged to be present when someone learns the lesson themselves. Which is how I came to share an iced tea in a cafe in Palo Alto with a good man embarking on a new business. Having recently left his job as much by suggestion as by choice, he had decided to strike out and build his own business. So pervasive was his fear regarding this decision, it was hard to think of anything else. In an entrepreneurial sense he was naked in the town square. He was betting his farm. He was pledging his reputation. He was in fact thinking a lot about things that felt like dying one way or another. I knew that no words from me were going to prepare him for the feeling of really owning his payroll, or worrying about growing a business with a wife at home and two kids in college. I could not have been happier for him though, so I asked him the only question that really mattered at the time: “Are you scared to death?”

I saw him rub some of the beads of condensation off his drink as he thought intently. I watched him die a little bit then and thought that dying should always be a difficult thing to share with someone else. I waited.

“I think so,” he said. “It’s hard to tell.”

“It’ll be okay,” I said. “You’ll be terrified and then you’ll get over it, because that’s what we do. You’ll probably be scared to death two or three more times before it works out the way it’s supposed to. You’ll be okay.”

Still staring at his glass, he asked, “You really think so?”

“Cross my heart and hope to die.”

That gave us both a good chuckle.

All this happened, more or less.

The Wednesday before Thanksgiving I am sitting in my office when a tall, skinny man wearing glasses comes in delivering my mail. This is unusual because I usually walk out to the front to pick it up. We’re into the lean startup thing which means lots of walking.

“You’ve got mail!” he says, winking at me.

I’m still pondering how he made it past the door that needs an electronic key fob to unlock, but I’m a sucker for trivia and he seems harmless, so I ask: “the AOL kind or Meg Ryan kind?”

“The free shipping kind,” he says and then pauses before adding in a stage whisper, “I never really thought she’d make a good ambassador.”

I looked at him for a full beat, wondering just what was going on. “Meg Ryan? She’s an actress not an ambassador.” And I am startled to realize I’m actually engaging in a conversation with a pasty faced stranger about Meg Ryan and AOL. It’s 10 am, and I feel like I need a drink already.

“Oh right!” he says. “She’s still an actress now. Right…” He continues quickly almost to himself. “Sorry, I’m a bit unstuck.”

I’m a little scared. He’s clearly off his rocker. “Look here, who are you and how did you get into my office?”

Instead of answering, he reaches into his pocket and hands me a card. It reads:

Dr. William Pilgrim
Optometrist

“Ok,” I say. “Dr. Pilgrim, what are you doing here? Can I help you with something?”

“Billy,” he says. “I go by Billy.”

I am stumped by the Billy thing. Who calls their optometrist, Billy? “This still doesn’t tell me where you’re from or what you want with me.”

“I’m from upstate New York, but that doesn’t matter. I want you to help stop something that is going to happen in your future. I’m here to try to get you to see what’s coming.”

“Now, just wait a minute,” I stammer. “You want me to stop something that hasn’t happened yet?”

“Right,” he says. “Just like it says on the card.”

“It says ‘optometrist’ on the card,” I point out.

“Yes!” He exclaims. “Optometrist. I help people see things more clearly. Get it?”

“You mean like a metaphor? Or is it a simile?” I couldn’t remember which was the right one, and I was never very good at the parts of speech. I’m still embarrassed by my SAT score in English.

“It’s a metaphor,” he says.

“So now I’m supposed to believe you’re a metaphor from the future? Ok, that’s it. I’m calling the cops.” I turn around and reach for my desk phone.

“You disconnected that last week,” he says.

He’s right. It’s that lean startup thing again. Landlines are so 2000. I pat my pockets for my cellphone.

“Wait!” He yells. “I can prove it!”

“That you’re a metaphor?” I am still fumbling for a phone. “That makes no sense at all.”

“No! That I’m from the future. I can prove I’m from the future.”

I have my phone out now but my hands are so sweaty, the damn fingerprint sensor won’t unlock the phone.

“It gets really cool on version 7,” he says knowingly. “Retinal.”

“What? But how can…”

“No time!” He says. “Well actually… lots of time… infinite really. But no time in this now. Here! Quick, look!” And he tosses the pile of mail down on my desk.

It looks like regular mail to me, until I look at the postmark. November 29, 2015. Two years from now. “Come on! You expect me to fall for this? Anyone can fake a date on an envelope.”

He smiles. “Look closer.”

I look again and then I see it. I thought it was hand drawn at first. Underneath the cancellation mark there’s an arc of an arrow curving to the right.

“You’re an Amazon Prime member aren’t you?” he asks.

“Sure,” I say. “Free shipping… Great deal.” I’ve been gripping my phone so hard, Siri is asking me if I need help with anything. I still think he’s crazy, but there’s something in his eyes that makes me sit still. “What’s Amazon got to do with my mail?”

“Everything,” he says. “That’s why I’m here. They bought the U.S. Postal Service last year… Sorry. They buy the postal service next year. You have to stop them.”

“Amazon does what?” I exclaim.

“They buy the post office. Bezos is a crazy big thinker. Too big. It’s the first step and he must be stopped now while it’s still possible.”

I know that Jeff Bezos is the CEO of amazon.com, but whatever… Billy the eye doctor is clearly whacko. “Why the hell would he do that? They lose money, they’re almost constitutionally incapable of making a profit. They don’t make a profit because their mission to deliver to anyone anywhere in the U.S. for a flat rate is too big. They…”

He looked at me, arched an eyebrow and asked, “Is that Amazon or the postal service you’re referring to?”

“Oh…” He had me on that one. Clever.

“Right.” He continues to speak as if I hadn’t interrupted. “Bezos was planning this all along. Brilliant… “ His voice trails off. “Bezos saw the same problem the telcos did in the 90’s. He was the one to see the answer was concentrated in one spot, so he grabbed it before anyone else could.”

“Saw what?” Against my better judgement he had my attention.

“The last mile! The U.S. Postal Service has built out distribution to every home in the U.S. They own the physical last mile; be it an apartment in NY or a cold fishing hut in Alaska. They’re beyond huge. They deliver 40% of the world’s mail! 31 thousand buildings that can be used as drop off and pick up points. 80 million packages picked up! 200 thousand vehicles! Even FEDex and UPS use the Post Office for a bunch of their shipping. Bezos saw he could get everything in one spot, so first he worked a deal to keep them open on Sundays to test his idea out before buying the whole operation.”

“I guess it makes sense,” I said, rising to the debate. “The post office needed someone to keep it from losing more money.”

“No!” he shouts. “Bezos needed the U.S. Postal Service more than the Post Office needed him. He played the loss making thing up in the public. Why do you think he bought a newspaper? Come on man, think! A Washington newspaper? He needed it for the public debate he knew he was going to have!”

“You’re telling me he bought a newspaper so he could buy the post office?”

“You’ll see. The Unions, the Senators, even the President himself–Bezos outwitted them all. The newspaper was the beginning, but it was the semi-independent platform he needed to talk about why leasing the U.S. Postal Service was such a good idea for everybody, and it worked.”

“Wait… Leasing? I thought you said ‘bought’.”

“Well, it’s a 99 year lease, but he took over the whole thing and is running it for them. The government got shares in Amazon worth way more than it was costing them to run the place themselves. It was the greatest public to private transaction in history. Mail delivery is seven days a week now and Amazon prime members can mail anywhere in the U.S. for free—they call it “prime class mail” now instead of first class. Bezos even did this thing where you could print out postage from your amazon.com account. It wasn’t until later that people figured out he had raised postal rates by making it a flat subscriber fee.” His voice picked up pace, and he was looking at the ceiling. He seemed feverish. “It was brilliant, he said, just brilliant. Because FedEx and UPS depend so much on the U.S. Postal Service, he was able to use his new leverage to reduce all of Amazon’s shipping costs before he wiped out the big retailers, all with the help and blessing of the U.S. Government.”

“You’re telling me he did all of this just so he could ship consumer goods?”

“Think strategically! He didn’t do it for shipping, he did it for taxes. He took over the postal service, and he got tax exempt status for everyone buying from Amazon in return.”

This was too much. “Give me a break!” I said. “If Amazon lets me ship for free and lets me buy things tax free, it sounds like a great deal. Everyone should be happy except Amazon’s competitors.” I had forgotten for the moment that this was not a rational conversation.

“That’s what the Walton’s argued before they started shutting down all those Walmarts. They sued. Get this: amicus briefs from all fifty-one states on behalf of Amazon. The states got a cut of the deal, and it sailed through anti-trust because Amazon was a quasi-governmental-company-hybrid. Like Fannie Mae, except instead of backing mortgages it was shipping hand soap. The last case got to the Supreme Court in 2018 and the ruling was a doozy. You’re a businessman, you’ll love it… Takes the whole “corporations are people” thing to its logical conclusion. Look, I’ve got to go. You’ve got enough warning. Just stop him before it’s too late.”

“Warning? Too late? Too late for what? Too late to get him to pay taxes?”

He looks at me for a moment as if weighing what to say next. “After Amazon took over all the back end services from the CIA, it was easy to win healthcare.gov and lots of the little stuff. They finally took over the IRS in 2020. Do you see? They know everything, and it all shows up on your Amazon home page. They know you need statins and that you deduct for a home office. I’ll let you guess what they do with all that big data… Let’s just say that at one point Amazon’s ‘recommended for you’ became very, very creepy.”

Billy reaches down and grabs the mail off my desk. “Can’t have any paradoxes, can we? I’ve got to go, Montana’s waiting. Stop him. Now, answer that call and tell her not to worry, you don’t need a new water heater.”

I don’t even get to ask him why he has to go to Montana. My phone rings, and I look down to pick it up. It’s my wife calling to tell me that there is a puddle of water under our water heater in the garage. When I look up, Billy’s gone.

So there it is as best I remember it. I guess we shouldn’t let the free shipping lull us into a false sense of security. Don’t say you weren’t warned.

So it goes.

Last weekend my son’s car was broken into. It was in the parlance, a “smash and grab” with the front passenger window smashed and his wallet grabbed. What followed was an interesting lesson in security. Our local police investigated the crime scene and dusted the car for fingerprints, they also noticed some blood splattered on the door. Apparently while the window was being bashed in our thief had cut himself. Always curious about these kinds of things I chatted with the police as they did their work. They were thrilled to have blood as opposed to the prints because the results of DNA testing would come back “much, much more quickly”–weeks rather than months. When I told them I was surprised that DNA would be quicker, the police chuckled and asked how many TV crime dramas I watched. The quick-scan-immediate-result fingerprint identification methodology I had learned by watching “Dexter” or any one of the CSI dramas is definitely made for TV. These days a set of fingerprints without a suspect can take as long as six months to identify (if ever).

Contrary to what CSI would have us believe, humans are still a big part of the analysis. The point is that fingerprint recognition at this scale is hard to do in a foolproof, automatic fashion.

Apple’s Risky Move

Which led me to thinking about Apple’s latest iteration of the iPhone and its fingerprint recognition technology. Granted, they have lowered the recognition bar considerably for themselves in that they are only trying to recognize up to five fingerprints per phone. But they’ve raised the bar in many significant ways: they definitely want a CSI instant-recognition moment and they want it to be completely foolproof. They want it to become indispensable. Think for a moment about what Apple is risking here: brand-new, unproven hardware on the most used button on its flagship product. Gutsy call. [pullquote]The inclusion of a fingerprint reader sticks out like the proverbial sore thumb[/pullquote]

I keep wondering, “why take the risk?” My fingerprints are ripe for the using on keyboards and trackpads and laptops. Why not just put a fingerprint scanner on a high-end Macbook Air to flush out any bugs and get some experience first? Doesn’t it just seem too risky to make the highest volume flagship product a test bed for something never built before? Had they left the scanner out, no one would’ve even complained. Between introducing a new OS and a new set of processors, there would still be plenty of room for innovation to be bragged about. The inclusion of a fingerprint reader sticks out like the proverbial sore thumb. Apple must’ve really wanted something to make this kind of bet this way.

To get to why Apple might take this type of risk right now, we have to stop thinking of the iPhone as a “phone”. I think Apple’s view is that the iPhone is an experience that happens to have a radio attached to it. Sure the iPhone can make calls, but in the end, voice is just an app. It’s the totality of the experience that matters. To paraphrase Tim Cook “… the key for having a great killer product is to have incredible hardware, incredible software and incredible services… and the real magic occurs at the intersection of those…”. Apple has realized that key to its future success is a maniacal focus on reducing the friction between the pieces of an experience that make up a product. The iPod, or Macbook Air or iPhone are always just a means serving the end of a smooth user experience. Think of Apple as looking for friction everywhere and seeking to get rid of it in the most unobtrusive way possible.

Frictionless Transactions

Imagine for a moment walking into an Apple owned bar to order a beer. Apple wants to do everything in their power to ensure that beer reaches me as smoothly as possible. They want me drinking, not waiting, not thinking about anything other than my next beer. They don’t see the beer as the money maker, they only see me–the beer is just a way extract money from my wallet. So the typical Apple way is to start a tab and stare hard at the bar top wondering why it isn’t as smooth as it could possibly be. A very slick bar surface means a beer gets to me that much quicker and seconds count because those seconds are when I am not spending money.

Apple did this with music and in just ten years iTunes has gone from nothing to almost $4B in revenue per quarter. Apple didn’t make the music, it didn’t write the apps it just made the purchases slide down a well varnished bar top. Walk into an Apple retail store and see this concept in full display: no cash registers, no queueing up. You can buy your selection right there from a pierced and tattooed Apple Genius before you’ve had that much time to think. Armed with your iTunes ID and a credit card on file, before you know it, you’re out the door with a receipt emailed to you… No muss, no fuss. Oily smooth. Have you ever wondered why it takes a couple of days for Apple to email an iTunes purchase receipt? Disconnect that momentary movie purchase from the friction of an immediate reminder of money spent and the second guessing goes away. Easy. Slick.

With the foresight to see really smooth bar surfaces as the key to unlocking billions of dollars of profit, things like uncured varnish, rough wood and bad joints become very annoying in Apple’s view of the world. Slick is their thing, so in the end they must, simply must, make the best bar. With a great bar, it is essential that the beer sliding ever so smoothly to a waiting hand is guaranteed to be paid for. A genius bar top and credit worthy hands can be a very lucrative business, metaphorically speaking.

Those credit worthy digits can be a huge source of friction. Taken all together there are over $3 trillion in credit card transactions every year. These are not necessarily easy transactions though. Merchants actually have a line in their budgets called “fraud review” and over 50% of that budget goes to a human reviewing a transaction to determine if it was valid. Every credit card company on the surface of Earth is trying very, very hard to determine if it was actually you that was making the purchase they are approving. Credit card processors have done studies on where you live, what you like to buy and who you are with to try to outguess thieves. The key is that the credit card companies want to know if it is really you before they lend you any money. Literally billions of dollars every year are lost just due to fraud alone. Add in how difficult it can be to even make purchases at retailers some times and we have a rough surface just waiting to be sanded down. [pullquote]A new idea is born: Apple can make money from the way money is being made.[/pullquote]

Apple must be sitting on a very interesting data set by now. After a decade of the iTunes store there are over a half billion active iTunes accounts with credit cards attached to them. Apple has seen more than its fair share of purchases and most certainly a decent amount of fraud. I’m just guessing, but at some point someone was probably tasked with lowering the amount of fraud in the iTunes store. Then someone else in Cupertino had the bright thought to check on how many of those fraudulent purchases were made using Apple devices in the first place. “Hey wait a minute!” this genius says, “We’re being scammed using our own products!” And wherever these ideas go in Infinite Loop to be combined with the other money-making memes, this one recombinates with low friction thinking. A new idea is born: Apple can make money from the way money is being made.

The Big Bet

This is why an untried fingerprint recognition technology on a flagship product is risked. Apple is after a big change, one that may take a while yet to pull off, but they almost have all the pieces to make their vision work frictionlessly. What if Apple could guarantee to credit companies and merchants alike that a purchaser was a valid purchaser? What if Apple could enable purchases in Sears (or any store for that matter) to be as easy and smooth as they are in an Apple Store? Apple surely must have considered what percentage of those $3 trillion in credit card transactions companies would be willing pay to enable a very secure, effortless experience. Seen this way, iTunes and the Apple Store, and now the 5s are test beds for a very big bet indeed.

The big bet is Apple knowing who and where you are and underwriting your purchase in whatever time or place is best for you. The iPhone 5s with fingerprint recognition enabled can definitively say that you are indeed you. Every sensor in the package combined with your fingerprint can say, for example, that you are standing in Nordstrom’s with a phone held level in your hand, screen facing up. The 5s can say you are buying a shirt. It can know the color of the shirt. Your iPhone can let you pay for said shirt with a stored credit card. You can walk out, passing the discreetly placed security card by the door without any hassle. How much would Nordstrom’s pay to Apple to have an effortless purchase happen in its own store? Put another way, what percentage of Visa’s fraud losses would they be willing to pay to Apple to materially reduce their own fraud loss?

Think this is a fantasy? Look at Apple’s own retail experience: Apple is the undisputed leader in retail revenues raking in $6,050 per square foot of retail space, more than double the number two company, luxury retailer Tiffany’s. Apple’s fraud loss numbers are not published but it is a safe bet they are lower than any other retailer. Go further and imagine a watch on your wrist securely connected to your iPhone checking your heartbeat, counting your steps, measuring temperature, sweat, sleeping, waking… The incidence of fraud moves asymptotically to zero when your credit lender knows that when you are sleeping you are not buying a book on Amazon, or filling a car tank with gas. Imagine every time you have pulled out your credit card to buy anything: groceries, airline tickets, a slurpee… now imagine being in a store, seeing a little Apple logo where the cash register is (or was), pressing down your finger and leaving. The vision of providing the best, most secure and easiest way to have a buying experience for anything, anywhere, anytime is a view so filled with hubris that it can only be held by a company like Apple.

Remember the good old days when it only took a quick look at Apple’s SEC filings to see the Steve Jobs had fired up the jet and was visiting record executives? We all knew another music deal was coming when the air miles piled up. There was a time when we thought it was ridiculous that Apple could make good money from selling music online. Apple reasoned that making the music buying process frictionless was enough to carve out revenue from a market that wasn’t making any money online. They even argued that making it easy and cheap to buy music reduced the online piracy of music. It seemed like a crazy at the time but they turned it into billions. Where is Apple going to get its next big money making disruption? We won’t see it in any SEC filings on the expense of the corporate airplane. A private jet to New York looks like another trip to visit Carl Icahn offering up dividends to buy some time while the bar gets some more polishing back in Cupertino. A trip across town to visit American Express is barely even noticed. My thought is that Mr. Cook already knows what he will offer is going to be far more readily accepted by the credit companies and retail operations than ever was by the media moguls.

He should know. He has his finger firmly on the pulse of the digital economy.