iTunes or Beats?

It's been roughly half a year since Apple purchased Beats, and apart from a few updates to the Beats app, not much has been done that is visible from the outside. To be fair, integrating a huge team into an even larger company with a unique way doing things isn't easy. Apple had to let go 200 of the 700 person team, likely because teams at Apple tend to be small. 

Recently, however, it's been reported that the Beats brand will be subsumed into the iTunes brand, presumably as the iTunes music streaming service. If Apple goes this route, I think they will be forfeiting a lot of goodwill from the Beats brand. 

iTunes is a dinosaur, and it is seen as such by many music listeners. At University, I know very few people who still use iTunes, instead opting for streaming services like Spotify, Pandora, and Rdio. iTunes has an ancient business model, requiring you to buy and own songs and albums individually. People have long been transitioning away from owning music to leasing it, and iTunes is associated with the old world. Rebranding the new Beats music streaming service as iTunes streaming, or something similar, will diminish the goodwill the Beats purchase brought. It must be difficult for Apple to let go of the product that started the whole music revolution, but every product has a definite life span and should at times be euthanized. 

When the Beats purchase was announced, I was looking forward to it being the new iTunes. I still think this would be the best strategy for Apple. Rebrand iTunes as Beats, and make the new service primarily a music streaming service, while also offering music purchases for those who want it. Although Beats headphones are looked down upon within the tech community, most consumers love them because they look great and are represented by Dr. Dre (who is not an actual doctor). Similarly, the music streaming service should be pitched as the cool streaming service - one that has ties to the music industry. Apple has many contacts in the music business, and striking deals with musicians and labels to promote their music on Beats would be a winning strategy. Of course, the music industry doesn't want to bow to Apple as it did with iTunes, but Apple has the leverage to negotiate favorable contracts (Apple had 800 million accounts registered in April, most of which have credit cards attached).

Apple probably did this cost benefit analysis, and it still decided to go with iTunes as the brand for all of its music products. They decided to keep the iTunes name because it's such an established brand, which everybody has heard of. But this is precisely why iTunes should be rebranded to Beats. People know about iTunes, but it's no longer the cool new product from Apple. The brand can stick around for another few years, but this is a long term play, and Beats is a name that can possess the cool factor for the next decade. 

Don't Drop the Box, Dropbox

Not long ago, cloud storage was extremely expensive to purchase. There was Dropbox at first, but Google, Microsoft, and then Apple soon offered cloud storage. Other smaller cloud storage services like Box exist too, but I won't focus on them in this post (I think they're just waiting to be acquired, and simply offering cloud storage isn't a viable business model). 

So that leaves Dropbox, which is not in a good place right now. Cloud storage has become a commodity; it's already offered for free in small storage amounts (around 30GB is given for free), and I expect unlimited cloud storage will be provided for free within the next few years from huge tech giants (Google, Microsoft, Apple, Amazon) which can subsidize it through their other revenue generators. Amazon already offers unlimited cloud storage for photo's for Prime subscribers, free of charge. Similarly, Microsoft offers unlimited OneDrive storage for Office 365 subscribers. Apple is slow to catch up here, but they will undoubtedly offer unlimited cloud storage too (they likely don't have the infrastructure to do so currently, but it's being built). The data centers are a fixed cost investment, and once they are built it costs very little to provide the additional users with cloud storage. And since these tech giants make money through their other services, they can afford to subsidize cloud storage, and tout it as an additional feature. Dropbox can't afford to do so, since cloud storage is their main money maker. 

Although I believe Dropbox's management knows that cloud storage isn't a sustainable business by itself, they haven't done enough to differentiate themselves. When broken down, Dropbox the company is three distinct products: Dropbox cloud storage, Mailbox, and Carousel. Dropbox purchased Mailbox in 2013, and launched its photo service Carousel in 2014, but in terms of products, that is all they've got. In most recent news, Dropbox also partnered with Microsoft, allowing Microsoft Office users to access the Dropbox directly from the apps. Here's my breakdown of those three Dropbox products:

Dropbox the service is unquestionably the best cloud storage provider - it's beautifully designed, cross-platform, fast, and extremely stable. But it's also the most expensive option, and great design will not convince users to pay when they can get a slightly worse designed cloud storage service for free.

Mailbox is a Gmail client, and how Dropbox plans to monetize this product is unclear. They can put ads into the app, but its been over a year since the acquisition, and no ads have been added yet. Of course, it can simply be a value-add for Dropbox subscribers, but it's currently offered even to free users.

The last product under the Dropbox umbrella is Carousel, which is also their least successful product. It's a glorified photo viewer that integrates with your Dropbox account. Again, nobody would pay extra for this when free options exist that are not much worse.

None of these things scream sustainable businesses. For people to pay for Dropbox, it must add considerably more value to them than competitor services. At the moment, this is not even close to being true.

That leaves Dropbox with a few, difficult options.

1) Sell Itself. Steve Jobs infamously called Dropbox a feature, not a product, when in negotiations to purchase it. While it looked for a little while that he was dead wrong, as soon as cloud storage became a commodity, Steve's quote seemed to ring true, and it certainly rings true today. Dropbox could easily find a purchaser today, and cash in for a few billion dollars. I would put their value at around $2B, but more speculative investors value it much higher. Google, Microsoft, and Apple would definitely be interested in such a purchase, if only for the design and engineering talent. 

2) Go Public. This can be a terrible option, as Twitter is currently learning. Going public would infuse Dropbox with a lot of cash, which it could use to hire more people and develop a larger portfolio of products. But I doubt that would give them a new business model and ways to become profitable 

3) Release More Products. This is easier said than done. In essence, what I'm saying here is that Dropbox should create entirely new products that may generate them revenues for sustainable growth. They tried with the acquisition of Mailbox and the creation of Carousel, but both of those products generate no revenue (goodwill, maybe, revenue, no) and function as slight supplements to Dropbox the service.

Dropbox is one of my favorite companies, which is why I want them to start thinking of how they will differentiate themselves. Currently, their future looks bleak. It would be a shame if they were acquired, but that looks like their best and most lucrative option.

HBO Will Finally Unbundle Itself from Cable

Last month, HBO announced that in 2015 it will offer an unbundled tier, allowing customers to view HBO content without a subscription from cable TV companies. Basically, HBO plans to compete with Netflix, Hulu, Amazon Instant Video, and many other similar internet streaming services. This raises a few questions.
 
Will HBO offer all of its shows as part of this package? Currently, HBO subscribers have access to HGO Go, which allows them to stream almost the entire HBO catalogue. In addition, HBO allows subscribers to stream its latest episodes at the same time they are premiered on television. Will this new option only let customers access the back-catalogue of older HBO TV shows and movies? If so, that will reduce excitement for this news considerably. 

It's also worth exploring why HBO finally decided to unbundle now. Currently, if you want to subscribe to HBO, you have to do so through your cable TV provider. So you end up paying the provider, who then pays HBO. With an unbundled tier, you will pay HBO directly, eliminating the cable providers from the equation. HBO must know there is pent-up demand for their content from cable cutters, but they don't know if it will provide them with enough revenues to totally cut them off from cable providers. That's why they haven't said what the unbundled tier will include - it's a decision they haven't made yet. The question HBO needs to answer is will they make more money by going directly to consumers, or through cable companies as they do now? 

I wonder what HBO will charge for this unbundled tier. If it was my decision, I would price it in the $30-40 range, because cable TV cutters are desperate for the service, and would have no issues paying that much for their favorite channel. In addition, the quality of HBO shows is in a class of its own. Their closest competitor is Netflix, which charges $8.99 per month. But the common complaint with Netflix is the quality of its content. I have only found old TV shows and movies on it. Once in a while I will find some fairly new movie or show, but that is far from the norm. HBO, on the other hand, has the best TV shows in the business, and should charge accordingly.

Robo Advisors

Personally, I dislike the term "robo advisor" - it's cold and unappealing. If you haven't yet heard of them, robo advisors are the recent crop of companies that manage your portfolio with minimal work on your part. They're basically financial advisors in the form of software. Some you might be familiar with include Betterment, Wealthfront, and SigFig.

If you follow VC funding, you'll know that many of these financial startups are getting many rounds of venture funding. It's obvious that these VC investors believe robo advisor's are the future of consumer investment spending, and have a high growth potential. While I agree that huge growth will come from these algorithmic portfolio management techniques, traditional investment banks will not pass this opportunity up. Thus, these startups will face heavy competition from traditional banks as they start to catch up.

Charles Schwab has already announced the launch their robo advisor next quarter, which will be free for Charles Schwab customers with $5,000 or more to invest (which is a measly amount, considering what other robo advisors require). You can be sure that similar financial services companies will follow suite, and offer identical services for very cheaply, or even free. The additional overhead to launch such a robo advisor service is relatively inexpensive, as it only requires creating and maintaining an algorithm that covers many customers (the costs are grossly simplified, but the point remains). And since nearly all of these financial services companies already have more customers than startups like Betterment and Wealthfront, they can spread their costs over more people, and pass those lower costs through lower service fees. This will put the financial startups in a very bad place.

Of course, VC's aren't vacuous and know this, but they have a greater tolerance for risk than you and I. I would wait before investing money with the startups to see the fees charged by the traditional companies. It's the fees that will get you, since the returns will be practically the same for everybody. Overall, I'm bullish on robo advisors, since they will make investing much more accessible to the average investor. And if the algorithms are good, they'll make the risk low too, which will be a clear win for consumers.  

Thoughts on Apple Pay

Credit cards became an instant success because they removed the friction in purchasing and created unbelievable value for consumers. In simple economic terms, the benefits of credit cards exceeded the costs. For Apple Pay to succeed, in needs to do the same. After a few weeks of using Apple Pay, here is what I found.

• Most businesses still don’t support it. I live in a large college campus, and none of the businesses in the area support it. Of course, this is not Apple’s fault, and the liability shift in 2015 should fix this, but consumers don’t care who's fault it is. They just want it to work.
• When the retailer does support it (the ShopRite, Wegmans, and Walgreens near me all support it), the technology is glorious. Payment is quick and easy. There is no need to carry a wallet with me. I feel like value is created because I can get in and out of the store quicker.

Most major banks and credit card issuers already support Apple Pay, but it’s the merchants who are holding out. I won’t delve deep into why, as Ben Thompson already covered this topic, but the effect is nonetheless the same: consumers are not able to use Apple Pay everywhere, seriously diminishing its value. Meanwhile, the merchants are also creating a mobile payment solution, a cute play on words called CurrentC, but it’s unlikely to gain any traction. 

Despite merchant opposition, I predict that Apple Pay (and Google Wallet, for that matter), will become the victors in the mobile payment space. Every iPhone 6 and 6 Plus comes with a NFC chip that enables Apple Pay, as will future all Apple devices. Consumers will come into stores wanting to use them, and the stores will budge. At the end of the day, it's money we are talking about, and merchants will accept it in any way possible.