Category: Think.Tank

A Few Takeaways From the Epic v. Apple Ruling

I know this has been a somewhat persistent subject, but the implications, from a broader antitrust standpoint, are important to keep a pulse on. Below are a few takeaways from the ruling.

  • Apple is not a Monopolist: This may be the most important statement to come from the ruling. Keep in mind many governments, including the US gov, are posturing themselves to start cracking down on “monopolies” via several bills and perhaps more DOJ/FTC lawsuits. Judge Gonzalez’s ruling in several areas will make future lawsuits against Apple much more challenging.
  • Judge Gonzalez was convinced that Apple provides significant value and competitive advantage with IAP. This means IAP is not going anywhere. Despite some of the headlines, Apple’s in-app-purchase will remain the default transaction mechanism consumers are presented with for App Store transactions.
  • Judge Gonzalez’s ruling affirms that Apple provides clear and distinct value from the App Store ecosystem and underlying mechanics, which include app review and IAP
  • The one area Apple will now be required to modify their App Store rules is around developers being able to “steer” their customers to other payment methods and options. It is unclear how this will be implemented, but from the initial wording, it seems unlikely app developers can attempt to cut Apple out entirely. Judge Gonzalez agreed all of Apple’s innovation and IP related to the App Store warranted a commission of some kind. She did not necessarily feel the 30% was justified, which I took as a hint for Apple to strongly consider lowering that rate as a whole. How developers will offer an alternate payment method or process via this steering provision and still give Apple some cut is unknown, but Apple has options in front of them to concede this point and still get a commission given the way this point was worded

One of the biggest things that stands out to me in this case, as well as the FTC vs. Qualcomm case, is how hard the burden of proof actually is in an antitrust case. Two of the largest antitrust cases of the last decade both largely went the way of the defendants in Apple and Qualcomm, respectively. Which, in my opinion, does not bode well for all the posturing of the US Gov to try and bring more monopoly suits against tech giants.

And, ultimately, governments tend to do more damage and enable a variety of unintended consequences when they try to forcibly legislate change rather than pressure the companions to self-regulate. This is where I think we would all prefer, for the most part, tech companies take responsibility to run their platforms in a competitive manner.

While I do believe Apple sensed the allowing of developers to steer customers to alternative means of transactions that IAP was the one they felt they would lose, Apple can still be rigorous in their approach here.

As details emerge on how this will be implemented, it will be interesting to see how Apple approaches this and how tightly they try to hang onto their 30%. As I have repeatedly said, the cleanest solution is for Apple to simply lower their rate. Alternately, after some other broad conversations, another potential angle is for Apple to split out the games portion of the App Store and have a dedicated game store where they are more strict in enforcing IAP and more closely manage the implementation of outside linking and alternate payment methods. Games account for ~70% of Apple’s App Store commission, so if there are going to be aggressive protecting IAP commissions, this is the area it makes the most sense to apply more stringent rules to.

The other angle that does not get talked about is Apple’s advertising strategy within App Store. There is a belief that I think is logical, that once Apple starts getting enough revenue from ads that they are then incentivized or more willing to lower their rate and allow the ads revenue to offset any losses. This theory has legs, but it is a big assumption that Apple’s ads business is lucrative in this regard.

Key Debate: App Store Commission Rate Drops and Competition

Things are already changing around Apple’s App store, and more will change with app stores broadly in the next few years. For Apple, their changes as of late are what many have referred to as “self-regulation.” Nevertheless, even if minor, Apple has made some concessions to start addressing some of the antitrust concerns surrounding the app store.

I firmly believe Apple has several more changes ahead for App Store that they will initiate whether legal regulation forces them to or not. But as I have mentioned before, none of these changes, even in a worst-case scenario, will impact Apple in any significant way. This is why I have consistently argued that making these changes for the better of the ecosystem, both now and in the future, is worth more than the small amounts of money they get or will lose from making changes to the App Store.

To summarize the economics again, Apple makes roughly ~$15-17b from their commission on App Store a year. That is roughly two weeks of iPhone sales in an average quarter. Apple makes two times as much total App Store revenue as Google, which likely means Apple’s commission is 2x that of Google.

Apple makes most, the vast majority, of their App Store commission from games. Several detailed financial analyst models approximate the percentage of commission Apple gets from games is ~60%. This suggests the only major threat to Apple’s commission revenue is if most game developers successfully bypass Apple’s IAP. At best, this is a long shot, given that IAP is a key reason for the lack of friction inside games that makes most microtransactions happen. And, even if an alternate in-app payment option was allowed to be offered, most normal consumers are unlikely to trust random game developers more than Apple. There are certainly a few game developers who could pull it off but certainly not most of them.

The foremost challenge I see is that as developers begin to exercise some freedoms to attempt to get users outside of Apple’s ecosystem to make a purchase, or try and onboard them in the app with a user account, enter credit card data, etc., all it will do is dramatically hurt the user experience for Apple customers. This is certainly true with purchasing a Kindle book via the Kindle app on iOS or signing up with Spotify, Netflix, etc., where you have to leave the app, sign up and transact, then go back to the app. All of these experiences are loaded with friction, and can you imagine a scenario where every app is free, but then the developer makes you jump through all these hoops to use it after you download it? The app experience would be miserable, but that is a likely road we could head down.

So what is the solution? Honestly, Apple needs to lower their commission to 10% for small developer businesses and 15% for everyone else. Apple needs to make it a no-brainer to use its IAP to collect transactions. The ONLY negative to lowering the rate is they would half their revenue on commissions. But, via regulation or self-regulation, they will lose money anyway at the potential cost of vastly injuring the customer experience with apps.

The positives dramatically outweigh the negatives here to just lower the commission to a rate that makes it a no-brainer for nearly everyone, including even someone like Netflix or Spotify, to embrace if they feel they can make more money by lowering friction to conversions.

But there is another angle I’m interested in. If Apple does, that is a huge positive if it plays out. If Apple dropped their rate down from 30% to 15%, it is reasonable that Google would have to as well. And what if not just Google felt pressured, but all the video game app stores got pressured? That may be a harder point to argue. Still, if Apple’s devices became more attractive as a platform for AAA game developers to embrace then, it would pressure console and PC distribution platforms to lower their rates as well. And if console makers really do operate at a loss, then a drop from 30% to 15% in-game commission could be quite devastating to their businesses. I am well aware this point on the AAA games is more broadly a less likely scenario, but I make it because Apple’s 30% commission was reasonable. After all, it was the standard for all game stores. If Apple lowers its rate, you could argue competitive and/or regulatory pressure could force all app/game marketplaces to do the same. At large, this would have some dramatic impacts competitively.

Lastly, while I advocate dropping the rate, which has both pro-ecosystem and pro-competition benefits, I still maintain Apple has App review processes that need to be refined. However, it does seem there are positive moves in this direction. Still, Apple’s success in some future platforms like AR/VR is dependent on the third-party developer goodwill they have had that is certainly being impacted at this moment. In my opinion, Apple can easily get this back and continue to modify and refine the App Review process in a way that gives developers confidence. Apple views them as partners may be the most important thing related to App Store Apple can do for its future.

App Store Regulations Debate – Apple’s Worst Case Scenario

It has been several months since the Epic v. Apple court case and just over one year since Epic’s battle with Apple began. Since a ruling is expected any day now, I thought making a few additional points would be good timing.

There is a range of implications to consider regarding certain outcomes, but the angle I will take is to assume the worst-case outcome in a few of the trial’s most critical points. I’ll then look at some of the implications assuming the harshest verdict/opinion. The bullets below will be the basis of ruling a worst-case scenario for Apple.

  • Apple must allow third party app stores
  • Apple must allow third party payments in its app store
  • Apple must allow developers to steer customer from the app store to an outside source for transactions

Economics. I’ll start with the economic impact. Assuming the following ruling and Apple losing any appeal, a big question will be what is the financial impact to Apple. The answer to this is tricky, but I think the key metric to understand is that currently, Apple pays around $15 billion a year to developers who make up about 6% of their revenue. Yes, $15 billion is a lot of money, but it is a drop in the bucket in the grand scheme of things for Apple and how they make their money.

The key to that $15 billion number is to know it mostly comes from games and probably less than 100 games driving the vast majority of revenue. The only way I see Apple taking a financial hit here is if all the games driving most of the revenue rally around a third-party store and ONLY distribute their games there instead of Apple’s App Store. On this point, it is not outside the scope of reality that if Judge Rogers rules Apple needs to allow for third-party app stores, she could also rule that all apps must ALSO be submitted to Apple’s app store. I make this point because Judge Rodgers went out of her way to mention that she recognizes the platform provider should get an incentive to keep the platform vibrant. So I find it hard to believe she would provide an opportunity for third parties to completely bypass the store or any avenue that allows for no compensation to Apple.

With all the variables that can factor into how Judge Rodgers may arrive at the listed bullets above and the ways that Apple will still be able to receive compensation, it is unlikely their $15b and growing cut of App store revenues takes too large of a hit. Plus, as I mentioned, even if it does, it is not that big of a deal. So in my mind, the economic impact is less of a concern.

Consumer Behavior. Tangled into the economic point is a broader point about consumer behavior should all the above changes be forced on Apple. To this point, I want to reference an excellent article by Benedict Evans where he makes the below point I wholeheartedly agree with.

There are lots of privacy and security arguments about side-loading, and to some extent also third-party app stores, but I would argue pretty strongly that this is mostly a waste of effort – that these are not a mainstream consumer behavior and the dominant route-to-market for most developers will be the default, preloaded app store.

This is essentially my conviction as well. Even in a worst-case scenario ruling, where all my above bullets exist as options for consumers, the vast majority of them will still use Apple’s default store and Apple’s default payment system. My confidence in this viewpoint stems from my many years researching consumer behavior and consistently quantifying how hard changing consumer behavior is once established habits have set it. I outlined this in my theory of behavioral debt piece many years ago.

Benedict also points out that only a few brands have the power to execute either a third-party app store or an alternate payment option to Apple. A good example of this is Netflix and Amazon for e-books who successfully, yet highly inconveniently, get customers to transact on their website and then consume on their Apple device. If I had to stake a bet, I’d say this and not a third-party app store would have more success but still be limited to only a handful of brands.

The important factor here is to recognize that the only reason a Netflix, or Amazon, can do this is that they are a large brand, trusted, and already managing customer relationships at scale. This applies to the argument for Spotify because I can guarantee that when Spotify started, if they asked customers to leave Apple’s store and go directly to their website to transact, they would never have grown to the size they did. It was primarily because of the lack of friction Apple provided an upstart company like Spotify that allowed them to acquire customers as easily as they did.

This provides the challenge to ultimately deal with the charge Epic has brought against Apple. The argument is that these rules are limiting innovation. And limiting innovation is something Apple itself would agree is not what they want. So, assuming it is true innovation is being limited, what is the solution? That is a harder question to answer, and I think it comes in two parts which I could probably write an entire analysis on individually. But, as much as I am sure Apple would disagree, I think dropping the App Store commission to 15% for developers that don’t fit into their small business program (those that make less than $1 million a year) would be a huge start. And then dropping the commission for small business program participants from 15% to 10% as well. But, again, neither of these changes would impact Apple financially in any significant way. On the other hand, in some cases, if Apple made it attractive enough that Netflix, Amazon, etc., would embrace IAP because of the dramatic decrease in friction, there is a chance Apple can win back transactions they have lost, which would be a net positive financially.

And lastly, as I outlined in the analysis of our developer research study, I do think some app store rules need to be changed/modified as well as the App Store review process, and those things would do wonders for Apple’s developer community and perhaps help eliminate some of the barriers the small developers face when trying to innovate on their app and service. Apple should be doing everything in its power to continue to incentivize the kinds of innovations that help developers make money because ultimately, by doing so, Apple will make more money as well.

Apple’s Competitive Advantage 2.0

One of the first articles/analyses I ever published on Tech.pinions was aptly titled Why Apple Has a Strong Competitive Advantage. I’m linking to this article, but I encourage you not to read it as my writing skills have greatly improved, and when I go back and read it..it is a little painful. Nevertheless, that article remains the most read article on Tech.pinions to this day and still generates significant monthly views because of people searching the term “Apple’s competitive advantage” via search engines. Meaning, this is clearly still a topic many are interested in.

I’m not going to go back through my points, but I will list the core pillars because I still believe they apply to Apple’s competitive advantage today. The core pillars of Apple’s advantage I outlined in my essay were:

  • Apple’s Hardware + Software
  • iTunes & Digital Asset Management (what turned into the services businesses)
  • Apple’s Retail Strategy

This piece was written in 2011, and Apple as a company has matured greatly. What I outlined for iTunes/digital was the early seeds planted for Apple’s services business, which is absolutely a key part of their differentiation and advantage. Other things I would include today are things like Apple being a functional organization (one PNL instead of competing business units) and their hyper-focus on customer experience as a culture and philosophy. One could argue these are ingredients of their advantage more than pillars, like their integration of hardware and software is or retail, and I could agree with that. But if I were writing that article today, I would add two new areas that I feel are undoubtedly pillars of Apple’s competitive advantage.

Apple Silicon
My belief that Apple’s investment in custom silicon is a pillar of differentiation won’t shock many of you since I cover this subject extensively. However, in today’s computing economy, I would argue that Apple’s efforts in Silicon are the underlying foundation on which ALL of Apple’s differentiation is built. Meaning, every other pillar of differentiation and competitive advantage is made possible because of Apple Silicon.

I’m not saying Apple would not be as successful if they never started making their own silicon, although I am quite confident the lead they have over multiple competitors would not be nearly as significant if Apple shipped the same silicon components their competition does. In essence, their differentiation and advantage would likely still exist, and it would just not be as strong.

Apple’s investment in silicon brings them many advantages but first and foremost is the custom tuning of components to hardware, software, and services vision. Apple has the luxury of roadmap planning in lockstep with hardware, software, and silicon engineering, and this is a luxury they have that none of their competitors do.

It could be easy to say their efforts in silicon are just part of their integration strategy. And that is true, however, I contend it is the core of their integration strategy. I’ve long said the famous quote from Alan Kay that “people who are really serious about software should make their own hardware” should be revised to say “people who are really serious about software, and hardware, should make their own silicon.” I think if Steve Jobs were around today, he would be ok with that revision as an orientating way that Apple thinks about integration.

Privacy
In looking at structural competitive advantages, we look for things that the company we are analyzing is uniquely equipped to do that competitors are not, or at least not in the same way. This is why I would add Apple’s efforts in privacy as a pillar of their competitive advantage.

Apple’s business model is a key reason they aren’t able to harvest user data for economic gain. I know this has become a topic of debate lately since Apple has been clear they do collect some data to improve their products and services for their users. However, there is a difference between observing some of your habits for other people vs. observing some of your habits to make your experience better, and Apple falls more into the latter than the prior. I’m still on the fence on a few areas with Apple’s advertising pushes, but that’s for a different analysis.

Ultimately, the point I want to make here is people trust Apple, and it is becoming clear their trust Apple with their data and their sensitive data. I’m not saying people don’t trust other companies, but I am saying that if you asked a random person on the street what technology companies they trust their most sensitive and private information to, it would be an extremely short list.

People have proven to trust Apple with their credit cards, location data, family location data and information, medical records, health information, and more. Of course, Apple didn’t get there overnight, and its efforts to protect consumer privacy have been around for a while. But making this a point of marketing and doubling down on privacy will award them some advantages that other companies will not have.

The main one that comes to my mind is around Apple Watch. Apple is by far the leader in wearable consumer devices, and the advancements made to Apple Watch every year only go deeper into a consumer’s health and well-being. However, they could not do this if they didn’t have a base of trust, and in some cases, are still working to earn the trust of their customer base.

Leveraging the Advantage
With those two additions to the pillars of Apple’s competitive advantage, I want to look forward to future products and industries Apple can move into. When we think about going deeper into health/healthcare, more personal and intimate wearables, computers like glasses and beyond, and even automotive where our lives are at stake, Apple Silicon and Apple’s privacy stance become fundamental advantages that will allow them to go into markets competitors can’t.

It is easy to see the whole picture now, but seeing how far back Apple has clearly been planning and deepening their advantage with the pillars of silicon and privacy as competitive advantages, shows us just how far down the road Apple thinks strategically.

Chip Shortages and the Trailing Edge

In the last few months, I have had some very interesting conversations with executives knee-deep dealing with the supply chain shortages for their company’s procurement. The narrative about the shortage of chips has concentrated on the leading edge manufacturing node, meaning 7nm, 5nm, etc. But from the conversations I have had, this is not the biggest issue impacting our industry shortage, nor is it their worry about where semiconductor manufacturers are investing their money. It turns out, the semiconductor’s biggest issue is at the trailing edge.

The Trailing Edge and Legacy Nodes
The leading edge gets all the attention because it is the most exciting. The leading edge powers the supercomputers in the cloud, our desks and laps, and our pockets. But computing devices are not just made up of leading-edge microprocessors. The vast majority of other components are made up of legacy nodes and quite often many chips on the trailing edge.

What became clear in these conversations is most of the fabs in the media like TSMC, Samsung, Intel, and even Global Foundries, to a degree, are not relevant in the trailing edge semiconductor manufacturing process. Most of the companies making these chips largely on 90nm process and larger are located in China. Generally, these chips are a commodity, which is why most big fabs do not invest much in the trailing edge. Yet, most modern digital devices run at least a handful of chips built on the trailing edge. So while not nearly as sexy as the leading edge, chips made on the legacy processes are still as important to the manufacture of computing devices.

No End in Sight
Sadly, this likely means there is no end in sight for the capacity shortage. The fear alone of semiconductor drought has caused most of the big technology firms to stockpile both chips and POs with suppliers. Unfortunately, this only exacerbates the demand and delay for the foreseeable future.

In discussions on the matter, even an easing of demand is not necessarily light at the end of the tunnel. This situation has highlighted the steep challenge of predicting demand and the fine line companies procurement divisions have to walk to manage such a diverse supply chain of components. However, there are worries that companies are now hyper-aware of the delicate supply chain balance and may move forward with a new strategy and philosophy of procurement that includes more advance purchasing and volume guarantees.

If, in the end, supply chain management and procurement logistics go through a strategy and philosophy change, it could mean a prolonged challenge to get core components in a timely fashion. The discussions of strategy happening in the supply chain are uncharted waters, which is fascinating in its own right.

A Point on Semiconductor Supply Chain Nationalization
I have written in the past the role the semiconductor supply chain plays in a national security discussion for a nation-state. This was the basis of my thesis around the US needing to invest more in semiconductor manufacturing for both the competitive need of its companies and its own national security. And while that is true and needed, it is likely entirely impossible.

Even if there was a leading node manufacturer owned by the US company and operated on US soil, said the company would still be subject to a global supply chain of parts required to make silicon. For example, things like wafers, lithography machines, etc., are generally purchased from companies outside of the US.

I make this point simply to say that for all the points we make about the need for local manufacturing of Silicon, the reality is we can’t escape the global supply chain of semiconductor manufacturing that make it near impossible for a nation like the US to have every aspect of that supply chain operations within its borders.

Our takeaway, then, is first and foremost that this semiconductor supply chain shortage has no end in sight. Second, manufacturers of mass-scale technology are securing their orders in bulk and creating a wait-in-line scenario for everyone else, exasperating the shortage. And lastly, even an emphasis on domestic manufacturing of silicon can’t alone solve this problem for companies that operate on its soil.

The Ad Business Paradigm Shift

A lot is going on in the world of advertising at the moment. Actually, I should clarify a difference between advertising (which, when done right, also contains a heavy dose of branding) and simply trying to sell a product. When it comes to the Internet and the many free ad-subsidized services that exist, anyone paying attention would agree the clickbait articles, dozens of trackers, websites filled with malicious code, and more have gotten out of control.

I understand this world all too well. From 2008-2010 I was very close to one of the largest tech blogs on the Internet. I spent a great deal of time working with them on their business model, growth strategy, and revenue growth strategy. The product itself was free but was subsidized with ads. During negotiations with our ad-placement agency, I was under the constant pressure of their demands of how they wanted ads to show up. The disconnect, which I found nearly impossible to educate them with, was that you could place all the ads you want in the world all over an article, but if it hurts the customer experience and lessons engagement, there is no ROI. This was where the internal data we had via reader (I still called them customers) analytics and ad-engagement were clear.

The battle I was up against was the belief that with enough ads thrown at a person, via pop-ups, video, in-line articles, etc., that you could inundate them to the point that they simply could not ignore it. This is where tracking came in, and I saw many internal ad-deck pitches that demonstrated volume across websites and some shady statistics about how that helps consumer awareness. But my gut was always that this would create a more negative sentiment to that product and brand than a positive one. What is happening with ad-tracking and following today is the equivalent of a traveling salesman following you around everywhere you go screaming “buy this product” at the top of his lungs. Such a thing would turn people off to the product, even if it is decent, simply because of the tactics of the salesman.

From years of studying this space and having spent time in it, I’m convinced of several things. The first one is that consumers genuinely enjoy discovering new products and brands that enrich their life. The second is that excess ad-placement, and tracking is a turn-off and creates a look of a desperate product or brand, then one confident to go up against the competition.

Google and Facebook are both central to this debate. Both have proven effective, given current means of ad-targeting. Both have lowered the customer acquisition costs for brands and product companies, but again at the cost of feeling creepy, or at the least overly aggressive. This is why Google’s announcement of phasing out third-party tracking cookies and their privacy sandbox is of interest.

From reading through the blog-post, on the surface, it appears Google is simply distilling the information gathered on a person to the bare minimum to put them into a defined cohort of interests. In some ways, this is how Google functioned in its early days and historically the analog age’s advertising industry. If I’m a reader of a magazine on skateboarding, or tennis, or cars, etc., then it is safe to assume I’m interested in said topic and products within the category.

This is why I’ve always believed niche content is the best bang for the buck for any ad or product spend. I’d bet good money those ads will perform better any day over Facebook and Google if done right and placed relevantly. Niche content breeds more engagement, and more engagement creates higher Ad ROIs.

Google remains in the best position here, with the exception of an audio/podcast platform which I believe are excellent ad mechanisms given the integrated flow of ad read and placement. For Google, YouTube is this mechanism, and I’ve noticed a lot more content creates on YouTube start to integrate ads cleverly into their content. Anecdotally, YouTube is becoming one of the driving forces behind my purchasing behavior as I find authentic product reviews on YouTube the most helpful source to influence my purchases.

While Google remains well-positioned, I still question Facebook here and its ability to adapt. I’m even less optimistic of Facebook proper where I can see Instagram in a better position to adapt. The Facebook app/website itself may very well end up being like Yahoo. Not dying but fading more and more into irrelevance. Facebook’s likely inability to develop new assets or acquire new companies doing something innovative in a social media adjacency is going to hurt the companies overall ability to compete, in my opinion.

The model Facebook has appealed to is the Web 2.0 way of advertising but not the web/digital world 3.0. Oculus may be the one bright light for the company, and if they can make the Oculus experience mainstream, there is more upside. But this is still a question mark if Facebook is the company that will mainstream VR and AR.

As I mentioned, advertising can not get in the way of the customer experience. This is an evolving landscape that will need to find a sweet spot in helping consumers discover new brands and products that enrich their lives without stalking them, harassing them, and protecting their privacy. That will be a cornerstone for success for any company looking to subsidize their service with ads, and that is still a very different world than we live in now.

Chip Shortages and Foundry Monopolies

One of the biggest issues facing the tech industry right now is significant delays and a backlog of semiconductor foundries. Almost every tech category has seen a boost to demand, and that led to a dynamic of significant demand and not enough supply of semiconductors.

While an unanticipated surge of demand is a chief cause of the chip shortage, China’s initial shutdown this time last year due to the pandemic was going to cause delays for the entire year regardless of an uptick of demand. The surge in demand exaggerated this problem even more, which now brings an important observation to bear.

When I wrote last week about Apple perhaps partnering with Intel, I was only scratching the surface of what should be on every tech companies mind if their products rely on semiconductors in some way. This shortage is brought about because of the lack of foundry options for semiconductor companies. TSMC has had the clear lead for several years, and if you want a product on leading-edge process, your only option was TSMC. Samsung kept pace, but they hit some snags with their 10 and 8nm product which led some of their customers to go to TSMC.

While TSMC is not a semiconductor foundry monopoly yet, we are seeing a glimpse of what the world may look like if TSMC either is the last foundry standing or, at the very least, having a multi-year advantage on leading-edge process technology.

In either scenario, competition is painfully impacted. If only a few of the biggest tech companies, with scale and money, have access to leading-edge process technology and transistor designs, then those companies will maintain an edge on everyone else because they will be the few who can actually secure inventory. Everyone else will have to wait to get their chips to market. This is not a good scenario.

While TSMC is investing in foundries in the US, right now in Arizona, it will take several years to build out and be ready to start producing wafers. But the dynamic of TSMC having a monopoly on the leading-edge process, at a minimum, is concerning since they control who can get supply AND they could control pricing. This is why it is of the utmost importance that foundry competition is established and remain.

Yesterday Joe Biden signed an executive order to investigate the issues surrounding the chip shortage and look to strengthen the supply chain. Many hope for a renewed focus and more investment around the Chips Act and actively look to make US-based foundries more competitive.

Semiconductor foundries are not startup opportunities. Therefore, the US government’s options are Intel and Global Foundries to support US-based semiconductor manufacturing. While I do hope there is more around the Chips Act that can be established, I do not have the most faith in the government to help solve this. Which is a key reason I mentioned Apple, as I feel it makes more sense for private enterprise to help Intel via joint ventures or supply commitments.

The Art of Dual Sourcing Foundries
Given the reality, both short and long-term is the industry will only have a few viable foundries supporting the growing demand and need for semiconductors, companies who can strategically execute a dual-source strategy will be well-positioned.

This was always something Broadcom did well. I recall many conversations with their executives who were proud of the fact their chip design libraries were portable, and they could make them at whatever foundry they saw fit. Qualcomm is similarly executing a dual-source foundry strategy as they have versions of the same chipsets made at both TSMC and Samsung.

Companies that dual-source will be extremely well-positioned to weather a number of different storms that could come their way. From the geopolitical that I have outlined before, national economic issues, global catastrophes, etc. While this isn’t discussed as much publicly for obvious reasons, it is top of mind for many executives in the supply chain and those whose companies make products via semiconductor foundries.

While I keep circling the wagon on this, the fundamental point that needs to be addressed in the long-term is how to keep foundry competition alive. I believe Intel is critical to that future, which is why the industry needs to be concerned with Intel’s future whether they buy chips from Intel or not.

Clubhouse and the Pure Play Audio Opportunity

Clubhouse has gained quite a bit of attention lately. Before I share how I’m viewing the audio platform that is Clubhouse, I think it is helpful to give a little context around the audio opportunity.

For a while, I have known that something was going to happen around a pure-play audio platform for 3 years or so now. The reason I knew was because of my work with the VC community. Several years ago, I did the rounds with most of the top-tier VC firms, and they ran me through their central investment thesis for the next several years. The audio was the most consistent thesis I saw that showed up in nearly all VCs investment thesis.

Essentially the thesis for audio was this. The visual opportunity is gone. YouTube, Snapchat, Instagram, Facebook, Netflix, etc., has sucked up all the available time to view something visually with our eyes. Basically, the battle for the eyes is gone, but the battle for the ears is a different story. We commute, we exercise, we walk, and in general, we do things where we can’t always stare at screens. This is where the opportunity for the ears comes into play. Pure play audio is an area most investors believed there was room to compete for consumers’ time. And thus, something in audio was going to come out of this.

Many investors believed Podcasts were the audio opportunity evidence but knew Podcasting platforms were mostly settled and would not be an investment opportunity. Then came Clubhouse, and now we have a highly evolved take on many previous audio platforms.

If you aren’t familiar with Clubhouse, it is basically an app where anyone can host a room, start talking, and people can show up to listen. Hosts of the room can invite listeners up to the stage to participate or call on listeners to ask a question to those on the “stage.” You can liken it to talk radio with listener participation, a panel at a conference where people with subject expertise have a moderated discussion, or even as one of my followers on Twitter pointed out like the days of Ham radio where people could connect and talk to each other even if they didn’t know each other.

The clubhouse is the evolution of many former audio meetings but not a 1:1 comparison to any of them. It is like many things but not exactly like any of them. This perplexed a lot of investors, but given their thesis, it was only a matter of time before Clubhouse raised funds.

What I find curious is the black and white nature of Clubhouse. The public commentary I’ve seen, at least, in general, paints it as the next big thing or a total failure waiting to happen, which will get crushed by other players. Its future is not so black and white, but when something new shows up, we don’t totally understand. This dynamic seems to be common, and quite curious.

The reality is Clubhouse could be big, or it could fail. Both possibilities exist. I agree with the investment thesis I explained, and pure-play audio is certainly an area of opportunity.

That being said, what I find interesting about audio, is how different it is from video. Video allows people to be more passive or let their brain shut off. Audio is a different story. Listening requires much more attention by the listener. Listening was at risk of becoming a lost art. This is why I think the pure-play audio opportunity is so interesting. One’s audience is potentially much more captive than any visual platform. And captive audiences are lucrative.

Lucrative niches have always been my personal thesis of how the digital world breaks up. I’ve always believed Facebook would struggle because it is too general-purpose as a platform. It was successful at first because it was general-purpose in nature and ultimately why it may fade into irrelevance someday. If your business is advertising, subscription media, or direct-to-consumer content or products, then a focus on a niche is your only way forward. Platforms that empower focused niches, like Substack for niche newsletters, or Shopify enabling as a platform for niche businesses, or in this case Clubhouse for niche audio, all become enablers of lucrative niches with little to no upfront cost.

While it is unclear Clubhouse’s fate, what it is enabling as a platform is the most interesting part of analyzing from my perspective. I caution being too optimistic or too pessimistic at this point. It’s easy to write things off we don’t fully understand yet but, as the thesis I laid out, there is something here.