The hidden side of AirPods pro
Cemeteries are full of companies that didn’t understand the power game.
From Apple news room (October 30, 2019):
AirPods Pro went on sale on Wednesday, October 30, around the world. AirPods Pro join the AirPods family and feature Active Noise Cancellation, Transparency mode, sweat and water resistance, and superior, immersive sound, in an all-new lightweight, in-ear design.
Alex Danco in a recent post entitled The Audio Revolution shows how the billions of headphones of all kinds that afflict our ears are gradually changing our perception of things in a profound way. For him, these headphones could well be responsible for the end of globalization and the return of nationalism. It is based on the writings of Marshall Mac Luhan, an English professor at the University of Toronto, who was very much in vogue in the 1960s and 1970s, for having developed a theory postulating the primacy of the medium over the message. Marshall Mac Luhan, in a deterministic vision, explained history through the media: speech had brought tribalism, printing Cartesianism and then nationalism, radio had exacerbated the latter, and television would bring the global village. Knowing that Marshall Mac Luhan passed away in 1980, it is important to recognize the relevance of his intuitions and their predictive power. It gave me the idea to explore the ideas of this university professor to see the implications for the strategic positioning of media companies today. The trend towards noise-reducing headphones is worth exploring.
Marshall Mac Luhan's thesis
It is structured around the following elements:
The medium (headphones, press, radio, TV, telephone, internet, etc.) is a tool that extends our senses, it integrates with them to such an extent that it eventually alters them for better or worse.
The alteration occurs because the medium tends to over-sell one sense at the expense of the others. The senses are like muscles that can atrophy or hypertrophy. Therefore, the impact on our constitution is permanent.
Our natural constitution requires us to process information by shortcuts. We fill in the blanks, no need for the information to be given 100%, this saves the energy expended by our neurons while leading to our active participation. Our attitude is probabilistic and we make connections by crossing our different senses to fill in the blanks. To make a comparison, we are equipped with ARM processors rather than Intel chips: fewer calculations for an almost as good result, at least sufficient for a smartphone...and or brain, provided we make a small effort to participate.
Not all media are equivalent: some use many of our senses in a balanced way (usually hearing and sight) and respect our participatory nature. Others use only one sense. They may then tend to overload it with information, compensating for the disadvantage of imperfect participation. Such a media atrophies our automatism of participation, of the management of ambiguity (the magic mix between the different senses) and exacerbates our desire to be secure (100% certain).
Marshall Mac Luhan thus classifies the media into two categories: cold, those that respect our participatory nature and warm, those that overload one of our senses with information: "a medium is hot when it extends one of the senses and gives it high definition" explains Marshall Mac Luhan. In its terminology, printing was a hot medium that exacerbated rationalism (absence of ambiguity related to the coordination of senses) and nationalism (need for security, our sense of sight learns to be 100% sure). Television, on the other hand, was a cold medium because it used two senses and it was necessary to fill in the blanks (this was the case in Mac Luhan's time when the signal was very weak, it is more debatable today). Here are some examples given by the author himself: "A cartoon is a "low" definition, simply because very little visual information is provided." Radio is generally a hot medium; print, photography, film and painting are essentially hot media. "Any hot medium allows for less participation than a cold medium, such as a lecture course allows less participation than a seminar, and a book less than a dialogue. »
The nature of the media (hot or cold) determines the message. As Marshall Mac Luhan says: "the medium is the message". A cold medium will encourage a subtle message, a warm medium on the contrary a sharp and clear message: the academic gives the example of the Nixon Kennedy debate. On the radio (hot media), Nixon seemed to be the winner with his sharp statements against a hesitant Kennedy. On television, on the other hand (cold media), Kennedy seemed much more comfortable because his coordination was better.
Finally, the nature of the media (cold or hot) explains the history of the world, it is technological determinism. Cold media encourage tribalism (participatory mode). Thus talk (cold media) bound the first men together who formed tribes. Then the printing press (hot media) gave order: men no longer needed to know each other, an orderly intellectual construction with the same language (scale economics) could bring them together and reassure them: the nation. Finally, the electronic media dominated by TV (cold media) tip the balance once again towards tribal but on a global scale: this is globalization. People no longer hide behind rules but dare to open up.
Cold media/hot media in the age of the Internet
Marshall Mac Luhan did not experience the Internet age, having died in 1980, and it is appropriate to extrapolate in his place. This is what Alex Danco does in his post: if the press (hot media) and then television (cold media) had become the dominant media after the Second World War, encouraging the global village (May 68 and its aftermath), audio took over through radio, podcasts and YouTube, three hot media par excellence. Alex Danco establishes an interesting taxonomy:
Twitter: cold (posts are limited to 280 characters, you must suggest)
SMS: cold (two-way conversation that evolves)
telephone (cold): same as above
Instagram (hot): the photo only uses the visual without participation, it is the starting principle of the application
Facebook (hot): each user exposes himself by giving information overloaded with himself (mainly photos and text)
Youtube (hot): the vast majority of YouTube videos are disguised audio files. Speech is predominant over the image, which is not very neat.
For Alex Danco, the hot prevails over the cold because of the influence of audio: if we add the time spent listening to the radio 1h30 per day, listening to podcasts, music or watching videos on YouTube, a good part of the day has passed. We could add TV, which is often more listened to than watched. We are formatted by our various headphones (establishing a privileged channel to receive this hot media) and are becoming more and more eager for security, order and certainty. These are his words:
The headphones, and the audio they whistle in our ears, have changed everything. Our social values and instincts have changed because of the headphones. Populism and politics have changed because of the headphones. I think there are even reasons to say that Donald Trump is president because of the headphones. The audio revolution took place while everyone was looking away.
Without falling into such a determinism worthy of Mac Luhan, the idea to retain is that the hot dominates and that it has an impact on our psyche. It was not given at the beginning of the Internet which promised to be rather cold: the interactivity of the Internet, its call to hearing and sight as well as the poor quality of the rendering (sent by packets according to the TCP/IP protocol), the zapping suggested a cold media favouring our qualities of participation and the management of uncertainty. However, uncertainty doesn’t sell well, big companies have taken over the Internet to make it hot and boiling.
This is evidenced by the announcement on the AirPods pro and on the IPhone 11.
Apple newsroom (September 10, 2019):
Cupertino, California - Apple today announced the release of the iPhone 11, featuring innovations that further enhance the performance of the world's most popular smartphone and improve the features most commonly used in everyday life1. Powerful and even more intuitive, the iPhone 11's new dual camera offers unprecedented video quality on smartphones and introduces Night mode for photos.
AirPods pro and iPhone 11 are the quintessence of what Marshall Mac Luhan calls hot media, selling high definition, some for sound, others for image. More recently still the update of the iPhone shows the very clear direction towards high definition. From Engadget (October 28, 2019):
Apple has just released iOS 13.2. If you own a new iPhone 11 or iPhone 11 Pro, you'll want to download this update as soon as possible as it includes Apple's new Deep Fusion photography feature. In short, the feature is Apple's response to recent advancements made by Google in computational photography. In the words of Phil Schiller, the feature uses "computational photography mad science" to process photos in a way that makes them look more natural, with less noise and better detail.
It's hard to get hotter than Deep Fusion!
How did we get here?
Uncertainty is not selling. One of the principles of value management is precisely: buy uncertainty and sell certainty. The idea is that as soon as the uncertainty disappears, the price will readjust upwards. Value management is an arbitrage that presupposes that the uncertain will turn into certain (in the right direction). Today, value management no longer works. Why ? The market rejects any notion of ambiguity: either a fact is 100% certain or it is uncertain, the gap between the two is impassable because there is no longer any certainty at 70%, certainty at 90%, etc. The idea of convergence seems ambiguous and is rejected. This is reminiscent of our headphone problem! What if they were the ones manipulating our brains and making them reject any idea of uncertainty? The headphones would then be responsible for both the election of Trump and the failure of value management... Other reasons can be found to explain this need for absolute security: the 2008 crisis for example or EQ or the ageing of the populations. The important thing to remember is that hot media resonate and are likely to change our sensory perceptions in the long term. The risk is to cause a hot media bubble: more hot media means more need for order and security, which means more hot media. The great strength of FANG is to stick to people's needs (helped by the elimination of friction brought by the Internet). They become our servants. So, if they perceive a need for security, they will respond to it and comfort it, it's as simple as that. That is why, as soon as they took possession of the Internet, they warmed it up amply, constituting the first signs of the bubble.
The hot media business model
Unlike the media of past eras relatively fixed in their structure (hot or cold), the Internet has made children that have become media in their own right hot or cold (Twitter, WhatsApp, Facebook, YouTube, etc.). As a result, competition laws have emerged where they did not exist before. Should we choose a hot or cold media instead? The law of the market has decided: hot media are largely dominant for two reasons:
They correspond to people's demand for more security: a clear and distinct message is preferred to an ambiguous message, whether delivered by audio or video. So they attract more members.
they present superior monetization opportunities. It should be noted that television advertising has never been able to gain market share on radio but has taken it from another less hot medium: the press.
Let us focus on these two fundamental aspects:
Hot media are the most popular media: Facebook has 1.6 billion daily users, Instagram more than a billion. YouTube gives its monthly figures: more than 1.9 billion users. In comparison, cold media trample on: Twitter at just over 300 million, Snapchat at 210 million. LinkedIn has passed the 500 million mark however but is a utilitarian, career promotion network: everything is suggested, nothing demonstrated.
Hot media create a kind of dependence of the one who receives the information on the one who gives it. His neurons are overstretched to capture information without feedback and lose their critical sense. Marshall Mac Luhan gives the striking example of Orson Welles who, during a radio show in 1938, managed to get thousands of people to take to the streets, making them believe that the aliens had landed. He had this striking formula: "Hitler did the same thing as Orson Welles, but he didn't play". A hot medium attracts gurus, personalities with sharp and assertive speech. This was true in the great era of radio and it is still true today. These gurus are nowadays called influencers. If you are wondering whether a media is hot or cold, just consider the number of influencers it attracts:
Some of the hottest media include Instagram, YouTube and Facebook. Among the coldest Snapchat, Twitch, Pinterest, LinkedIn and Twitter.
This is the ideal recipe for monetization: more people more dependent on the message we give them! This explains why Facebook and Instagram (hot media) make most of Facebook's revenue while WhatsApp and Messenger (cold media) are largely under-monetized. Even within Instagram, the hottest part (photos) monetizes better than the coldest part (stories). This also explains why Snapchat and Twitter are stalling.
Why are cold media less selling? 1/ The sender and receiver are in participatory mode, the neurons of the receiver are engaged in something other than receiving an advertising message. We would not want an advertisement to interfere with a WhatsApp discussion. 2/ Clear (hot) messages are more suitable for advertising than ambiguous (cold) messages.
Two special cases are interesting to consider:
Apple
Apple is the pinnacle of what can be called a hot media. Its objective is to make people forget the materiality of the conduit so that the information is received without being altered (very high definition), whether it is the image or the sound. The iPhone becomes a camera that restores the image as if you were there, the AirPods pro suppress all external noise to make the sound of the transmitter perfect. No need for participation is necessary, comfort is in the reception area. Apple has understood the spirit of its time very well and is surfing on the hot trend. And in keeping with its culture, Apple integrates hot media downstream: podcasts (1st application in terms of audience), Apple Music, Apple TV+, Apple news +, Apple Books, etc. The company thus has excellent monetization vectors as I have analyzed in this article. Apple will not stop there. Augmented reality glasses could be released in 2020: it is difficult to find warmer: reality will be overloaded with both visual and audio information. We will become automatons, buyers of Apple products for even more comfort and security.
Sirius XM
This pay radio is well known in the United States where it has about 30 million paid members. Sirius is a satellite radio integrated into about 50% of the car fleet and 80% of new cars. Investors are easily septic about Sirius because on the one hand the satellite seems outdated and on the other hand the automotive market is cyclical: Sirius wins 2/3 of its subscribers when new cars are sold.
Sirius' true secret is to be a hot, boiling medium, which allows it to monetize its subscribers remarkably. The car offers hearing protection from the outside world (especially in new cars) and has a similar effect to AirPods pro. The listener can be overloaded with auditory information, without interference (the satellite is very good for this). Sirius had the wisdom, just like Apple to do downstream integration with hot media (there is symbiosis). Sirius owns its radio channels which are targeted by passion (no ambiguity) and influencers. The most famous is Howard Stern, an abrasive personality, cut off with strong anti-French primary feelings. His warm personality is perfectly adapted to the warm medium of Sirius and is a hit. Sirius knows that to be successful he must sign long-term deals with hot personalities (megastars as Chris Meyer, his CEO, calls them): James Lebron, Kevin Hart, Tom Papa, Fortune Feimster, etc. Like Apple, Sirius plays the integration of hot media, which allows it to add around 1 million new paid subscribers per year and to achieve free cash flows of around 20% of turnover! Now that everyone is plugged into better and better headphones (a clone from inside a car), Sirius ventures out of the car and has bought the Pandora internet radio. It then aims to build its influence base on 100 million members initially and then extend it. This strategy is interesting because it gives Pandora a clear advantage over Spotify. The latter lives entirely from the catalogue, and mainly from old titles (more than five years old), therefore from the past. This is not the best way to be competitive. Sirius will be harder and harder to counter.
Facebook's original positioning
Surprisingly, Facebook is seriously cooling its social networks. This excerpt from the latest conference call hosted by Marc Zuckerberg on the 3rd quarter results speaks volumes:
We do not let any of our Newsfeed or Instagram teams set targets for increasing the time spent on our services. We rank news to encourage meaningful social interactions and help people communicate with friends, family and community. We have taken many steps over the years to combat bait and polarization, and now we are even testing the elimination of accounts as in Instagram and Facebook. And we do it because we know that if we help people have meaningful interactions, they will find our services more valuable and that this is the key to building something sustainable and growing over time.
Last year, you will probably remember that we made a series of changes that focused on friends and family and reduced the time spent on our services. The one change removed 50 million hours of viral video per day and we did it knowing that people would spend less time on our applications, which is not what you do if you give priority to engagement over everything else. So I take the implementation of these incentives very seriously and we are prepared to make huge sacrifices in the short term to do what we think is right and we will be better in time.
What a difference with YouTube! Everything is done at Facebook to cool down: the development of stories (cold), small groups to develop interaction (cold), the deletion of viral videos (cold), the promotion of virtual reality (cold) versus augmented reality (hot). Marc Zuckerberg has the intuition that cold media are the future because they correspond more to man's nature. It was the reason why he was paranoid about Snapchat. Marc Zuckerberg shows some panache wanting to burst the bubble of the hot media, even if this leads to less monetization in the short term. (Warning: Facebook does not, however, intend to deprive itself of its (hot) cash cow, the news feed). "Move fast and break things" is Facebook's motto. The company will have to expand to other forms of monetization (not obvious when advertising represents 95% of turnover): this militates for the Libra project and the transition to the platform model.
Facebook is often vilified for its breaches of privacy. Apple does not miss an opportunity to boast as it is respectful of this privacy. Tim Cook said: "With Facebook, you are the product". Facebook is taking its revenge: it wants to make Apple and Google (more and more interested in hardware) appear as bad people, modern-day tobacco producers, eager for monetization at the expense of people's health.
If Marc Zuckerberg succeeds (let's be deterministic), then value investing could be all the rage again