Volume 42: Apple’s rundle, Amazon lux, retail insights & predators.

1. The one rundle to rule them all?

tl;dr: Apple’s worst kept secret finally sees the light of day.

Last week, Apple finally unveiled its worst-kept secret: the bundling of entertainment and cloud storage services under the Moniker “Apple One.” Aside from a name straight out of the Microsoft playbook—the irony of the name “One” being that there are so many ones that there can be no one, one—we should really ask why this matters.

There are essentially two reasons why Apple should do this. The first is driven by stock price. Right now, the business model du’jour on Wall Street is the “rundle”, which is short for “recurring revenue bundle.” If we boil it down, this means bundling products or services sold as a subscription. Think everything from your G-Suite subscription to Panera bread offering unlimited monthly coffee for $8.99/month. (As an aside, this is also why Microsoft is paying $7.5bn for ZeniMax Media, which owns game developers Bethesda and ID. They want the ZeniMax catalog of hit games for the Xbox subscription gaming service, which already boasts 15m subscribers.)

Anyway, with SaaS software and bundled services like Amazon Prime demonstrating the power of attracting and retaining customer wallet share, Wall Street has responded by valuing rundle businesses at a higher multiple than businesses with non-subscription business models. From an a CEO perspective, this means the opportunity to double your share price without having to double your earnings.

The second reason is defensive and competitive. Apple faces a price-driven competitive threat to its mature iPhone business. Even though the top-end iPhone costs over $1,000, Apple has been forced to adopt a much lower entry price of just $399 for the iPhone SE because smartphone pricing has been trending sharply downward. For vastly less, it’s now easy to find Android devices with larger screens and bigger batteries.

The Apple One bundle makes sense as a unique differentiator when considering the challenge of price-driven hardware competition. By offering a bundle of services, Apple are seeking to build meaningful differentiation relative to the market: While you might be able to buy an excellent phone for 1/4 the price of an iPhone that works almost the same as your iPhone and that replicates almost all of the apps on your iPhone, you simply won’t be able to get the Apple services experience on it.

So, will it work? Well, right now the jury is very much out. The bundled pricing is hardly compelling and Apple services offerings to date haven’t been particularly good: The Apple TV catalog is anemic, Apple Music has no stand-out feature and continues to lag Spotify in innovation, iCloud is hardly the most compelling cloud service, News+ has, so far, been a complete bust, and we’re yet to see what the new Fitness+ service brings to the table.

However, Apple has the distinct luxury of time and money and a vast number of installed devices on its side. If, instead of an endgame, we view the launch of Apple One as an opening salvo, things could get interesting. It conceivably gives Apple the flexibility to shift lower end iPhone pricing closer to a razor and handle model. Or push unique, higher-value services to drive value and differentiation for higher-priced i-devices. Or both should they wish.

With so much of their future stock price likely dependent on the capacity to successfully drive growth in one or more rundles, expect them to push really hard on this in the future.

2. Prime shipping versus the exclusive shopping experience.

tl;dr: Amazon takes on luxury.

Amazon has rightly been identified as one of the best in the world at using data. They certainly have enough of it. And yet Amazon continues to demonstrate just how fuzzy this use of data is. In addition to sending emails promoting products I already bought…from Amazon, they also just invited me to trial their new luxury offering.

Now, I’m assuming they sent this invite far and wide because I literally come from the land that fashion forgot. I’m also far from likely to purchase a $3,000 cocktail dress, which seems all that’s on there right now. But the invite piqued my curiosity because luxury is an arena Amazon’s been trying to break into for years.

Why, you might ask? Well, when you’re at Amazon's scale, growth is dependent on playing in every major category, and luxury, with around $1trn+ in sales globally, is an arena where Amazon’s current share is very, very small.

It’s also an opportune time for them strategically. Luxury sales are down significantly as the pandemic changes our social behaviors, distribution challenges are mounting as department stores and luxury retailers declare bankruptcy, and financial pressures from Wall Street and private equity owners likely means digitally enabled distribution has become more important than maintaining an exclusive shopping experience in a luxury store.

So, what does Amazon bring to the table for consumers in this deal? Well, no matter how much they try and pimp the Amazon shopping experience (and they’re definitely trying), this likely boils down to the convenience of Prime shipping and easy, no hassle returns. Which makes this a fascinating experiment in the psyche of luxury retail. Will the convenience of Prime shipping trump the kinds of exclusive shopping experiences most luxury brands have invested in over recent years? Or will buying a $3,000 cocktail dress for delivery in a cardboard Amazon box create cognitive dissonance? I don’t know.

Likely the answer will be “both”. Some consumers think nothing of buying luxury items from Amazon, some will rather gnaw their own arm off, and others will choose either Amazon or the luxury store depending on their mood and need. If we look for learning from other categories, rather than new channels replacing old channels, we typically see that consumers spread out and use all of them depending on the situation, which is one of the reasons Byron Sharp highlights physical availability as critical for brand growth.

But, returning to the data conversation I started with for a moment, what’s most fascinating is if Amazon partners with luxury brands to bring their data and retail technology to the fore. What if luxury brands were instantly more data and digital savvy (via Amazon in the background) than they’ve ever been? And what if their physical retail were enabled by Amazon tech where you could just walk that $3,000 cocktail dress straight out of the store like you can a bag of potatoes at an Amazon Go? What new experiences could be enabled? (Of course, just as likely will be Amazon monitoring luxury sales to create copycat brands just like they do hundreds of times already).

Anyway, much like Apple One is an opening salvo rather than the end game, so is Amazon in luxury. I predict this will evolve rapidly in the future.

3. “The Golden Era of predatory capitalism.”

tl;dr: The malignant metastasization of venture funded business.

I’ve written before about the cynical malignancy of what’s happened to VC funded consumer startups over the last ten years. Businesses that look a lot less like businesses and a lot more like toxic financial instruments playing a high stakes game of pass the parcel, where pretty much the only goal is to make sure you’re not the one holding the flaming bag of dogshit when the music stops.

The formula is simple: To mitigate the reality that we’re in a low growth economy, artificially spike growth by offering a digitally enabled product or service to the consumer at way below the per-unit economics of what it costs to sell, then raise hundreds of millions of dollars based on the growth rate you’re now demonstrating, then proceed to destroy the economics of the category you’re in, then cross your fingers and hope that either an incumbent buys you and takes you off the game board, or that everyone else runs out of capital before you so that you can raise prices and squeeze suppliers and make bank forever.

The problem with this, aside from the fact that these are terrible businesses, is that it creates an environment attractive to bad people who are incentivized to act terribly. And, unfortunately, when you find bad people being incentivized to act terribly, you also find good people acting just as terribly because they feel they’ve no other choice and it’s “what everyone else is doing.”

For far greater clarity on this phenomenon than I can provide, I recommend reading this Twitter thread by the always clear-eyed Cory Doctorow on the predatory behavior of delivery apps and how they destroy the restaurants we all want to support and see thrive.

Some lowlights:

• Yelp fraudulently lists the Grubhub call center as the restaurant in its listings

• Ghost kitchens that clone restaurant menus are being created to pass themselves off as the restaurant

• Delivery apps create fake websites for the restaurants and then use SEO to ensure they rise to the top of search rankings

• Tax evasion to avoid paying local, state, and federal taxes is widespread among delivery apps.

• Delivery apps trick drivers into becoming dependent on them for income, then slash their pay while maintaining the pretense that they are “independent contractors.”

4. Amazon-funded research claims Amazon is not a monopoly.

tl;dr: Interesting research, but be clear-eyed as to the source.

In another interesting Twitter thread, a researcher recently shared data on shopping habits during lockdown. Before sharing what I think are the most interesting insights, I want to caveat that this research is apparently “supported by Amazon.” Now, considering that Amazon is currently embroiled in varying degrees of anti-trust concerns, and because Amazon is hardly well known for sharing proprietary research or data, we have to assume this thread is more PR for Amazon than data on pandemic retail spending. But that said, just because it’s Amazon PR doesn’t necessarily mean it isn’t true. So, with that out of the way, what are the highlights worth paying attention to:

• While online retail sales spiked during the pandemic, physical retail still dominated, even at the height of the lockdown period.

• As economies around the country have re-opened, online sales have slowly dropped, and physical retail has ticked back up.

• The biggest sales growth was seen in multichannel retailers, not pure play digital, and new innovations such as curbside pickup have proved popular and are likely to stay.

• As a result, the role of the physical store has strengthened, creating a dynamic where a higher percentage of non-food retail sales will be backed by a physical store in 2020 compared to 2019.

Of course, this conveniently doesn’t mention that Amazon struggled to service demand during the early weeks of pandemic lockdowns, which sent consumers to alternatives instead. It also doesn't mention that retail is concentrated in the hands of just six retailers as small businesses collapse. Or that the critical designation of “essential,” which meant a retailer could stay open while others were forced to close, only applied to large-scale multi-channel retailers.

But all that aside, it does provide an interesting perspective and reiterates that while online sales have increased, tales of the death of physical retail are likely overhyped.