This Week in Tech 481 (Transcripts)

Leo Laporte: It's time for TWiT, This Week in Tech. This week we've got a great panel for you. We've got Ben Thompson from Stratechery, from Philip Elmer-DeWitt, and from The Mac Observer Dave Hamilton. We've tried Apple Pay, why doesn't it work, and why doesn't CVS use it? We will explain it all, and has Google peaked? Ben says it has; we will find out why next on TWiT.

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This is TWiT, This Week in Tech, episode 481, recorded October 26, 2014.

Good Touch, Bad Touch

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Leo: It's time for TWiT, This Week in Tech, the show that covers the week's tech news. It's been a very interesting week, and fortunately we have a very accomplished panel to help us dissect it. We will start all the way with our senior member Philip Elmer-DeWitt, for many years he has been at writing about technology, but he is actually one of the senior members of the tech journalist clan. He started, started Times Technology Coverage, and worked at Bolt, Baranek, and Newman in the early days of the internet; Philip, welcome.

Philip Elmer-DeWitt: Thank you, thanks for having me.

Leo: It's great to have you. You probably can tell just looking at him that he's in Massachusetts.

Philip: Yep, I am in Massachusetts.

Leo: And the room is heated by a fireplace, one in every room.

Philip: Yes it is.

Leo: I could tell. I know, I grew up in Rhode Island. I knew what these things were like. Also, from Taiwan joining us, the man in charge of Stratechery, Ben Thompson. Always great to have Ben on. Good to have you, what time in the morning is it?

Ben Thompson: 6 in the morning.

Leo: Thank you for getting up early. I can't thank you enough.

Ben: No, I'm just happy to be here.

Leo: We love having you, and Stratechery is a great, very insightful blog about the tech industry. It's kind of a must read. Finally, from The Mac Observer, it's great to have Dave Hamilton back, the founder of The Mac Observer. He does the Mac Geek Gab Podcast.

Dave Hamilton: Say that 10 times fast.

Leo: How do you, yeah? Did you think about that when you named it?

Dave: I did not, no, but now I can say Mac Geek Gab in my sleep, so, you know, it's just one of those things.

Leo: Yeah, TWiT, it's easy, TWiT.

Dave: I know, see, you thought about that. It's not your first rodeo.

Leo: Not my first rodeo, no tongue twisters here. Since we've got somebody from China we are going to start with, this is not one of the top stories, but still an interesting story, Mark Zuckerberg in Beijing meeting with or talking to, who's he talking to? Chinese people? I guess.

Ben: It's Tsinghua University, and you just waded into it by calling it someone in China when I am in Taiwan.

Leo: Oh god no, he's not in China, he's in Taiwan.

Ben: See, now you are in the middle of it because now you just insulted the other half of your audience.

Leo: Now I just swung the other way. I forgot, yeah, you are in Taiwan, which the Taiwanese consider China, no?

Ben: It's complicated, I believe that the official US status anyway is that it's undetermined.

Leo: Oh great.

Ben: It's easiest to just leave it there.

Leo: He's in Taiwan, and that's what we really need to say. So in the middle of this talk he starts speaking Chinese?

Ben: He did the whole thing in Chinese.

Leo: 30 minutes.

Ben: Yeah, whoever was with him asked him to introduce himself, he did it in Chinese and they loved it. They thought he was going to switch to English and he never did, he did the whole thing in Chinese.

Leo: The thing that is amazing about the Chinese people in general, I studied Chinese in college, is you can have the most exorable Chinese, the worst accent in the world, and they to a man say, oh, you sound great, you sound really good, right?

Ben: No, absolutely. I thought it was very, very impressive.

Leo: Let's hear it, let's hear Mark speak Chinese.

(Video plays)

Leo: He sounds like an American speaking Chinese.

Ben: He said, "My Chinese is very terrible." I said that's not wrong. Basically, he has a very impressive vocabulary but his pronunciation is very poor.

Leo: He's not getting the tones it sounds like.

Ben: Right, he has no tones at all.

Leo: No tones.

Ben: It's like, whoa, whoa, whoa, those were three different words.

Leo: But he just says whoa.

Ben: Basically it makes sense. It sounds like someone who studies quite a bit on their own but very rarely has a chance to speak to someone regularly.

Leo: Can I just say that it's damn impressive? He's a man who dresses his own meat, runs one of the biggest companies in the world, is one of the richest people under 30, I guess he's 30 now, but for many years was one of the richest people under 30, and by the way he's been studying Chinese in his sleep.

Ben: In his spare time. It is very impressive, and I thought people giving him the whole why do people want to show that they are good at Chinese giving him crap about it. I don't think that was very fair, and you are right, I've found just speaking a little Chinese, everyone is yes, it's great. There is a lot of appreciation for it especially in China.

Leo: It's more about the effort.

Ben: It's not just that. With the risk of going into something else, the way things are in China, where we used to be the center of the world economy, which is true. We have just been held back in the last few years and now we are regaining our rightful place. Obviously to have someone of Zuckerberg's stature who has clearly spent the time to come in and speak Chinese, I'm certain that generated a tremendous amount of goodwill. I don't think that is going to get Facebook unlocked in China, but I could not be more impressed and think that there was nothing but upside as far as him in China goes. I think all of the people saying that he spoke like a 7 year old sounded like whiny 7 year olds.

Leo: That ain't bad. I would be glad to speak as a Chinese 7 year old. His wife Priscilla is Chinese, but is she of Chinese ancestry or...

Ben: She's Cantonese actually, she's from Hong Kong. I was surprised that he mentioned that she spoke Chinese. I actually looked it up. I think that she speaks mostly Cantonese.

Leo: It's a very different language, it's like French to English.

Ben: Yeah, it's in the same general family, but it's definitely a different language. His Chinese sounded like he really doesn't speak it, more like he practices a lot. It's incredibly impressive. I have nothing but great things to say about it.

Leo: He's got book learning.

Ben: That's exactly what it sounded like, yeah.

Philip: You know what impressed me was that he was cracking wise and he was getting big laughs. This is a guy who is very uncomfortable on stage in his native language and he was like a comedian, he was doing standup.

Leo: He's much more comfortable speaking in Chinese then he is in English. That's a very good point.

Ben: He's come a long way in general, but I think as a great example that there is a lot of people in any language, but there tends to be a challenge in this culture that if you are not perfect, you are not doing it exactly right, you are very fearful to kind of step out and do it. He was not perfect, but he did it. I thought it was awesome.

Leo: So let's listen a little more. I want to hear a little more Mark Zuckerberg. The audience loves it, and if you are making jokes in another language that's a pretty good grasp of the language.

(Video Playing)

Leo: He sounds like the Apple iPhone stream. I'm sorry, that was a bad joke. Speaking of China, Tim Cook went to China. I don't think that he was speaking Chinese to the Vice Premier. We kind of speculated that the CEO of Apple went to China because somehow The Great Firewall of China was actually intercepting traffic to along with capturing the login and then passing Chinese nationals along to iCloud presumably to gather credentials to the iCloud server. This was discovered by, one of the watchdog groups that monitors The Great Firewall of China. The Chinese government immediately denied it saying that it wasn't us, although it's hard to imagine who might have been able to do that. The very next day Tim Cook shows up in China. Even the Xinhua news agency even said to talk about telecommunications. I doubt he was speaking in Chinese at the time.

Philip: It was because he needed to talk about security issues. You know, the speculation that he flew there just because of this turns out not to be true. He is on the same board on the same university that Zuckerberg was on, so he spoke to them as well. This was a pre-planned trip, he had a lot of Apple things, he went to Foxconn..

Leo: And Xinhua.

Philip: And Xinhua. They are making iPhones as fast as they can. They have a renewed commitment to build 40 Apple stores in China, which would trip the number of stores that they have now. The security issue is an issue, and that he got an audience with the Vice Premier, and that they had what politicians call a frank discussion, which means they hated each other and yelled, is significant I think. We will see what comes of it.

Leo: It's interesting to see the picture of Tim Cook and the Vice Premier Zhang Gaoli together because it reminds me very much of the same picture of Richard Nixon with Joanne Li sitting in the very comfy chairs stiffly acknowledging each other with the tea between them. You've got to know, this is the picture, you've got to know that this is a very important market for not only Apple, but if Facebook could get that market, for Facebook. You may remember at the Apple event Tim Cook spent a very long time standing in front of the Chinese flag, clearly a photo opp, talking about the iPhone entering China. This was the iPad event. It is said that he was also very anxious to talk to the Chinese government about Apple Pay.

Philip: Apple Pay. He said in an interview he gave on the last day there that that was the number one thing on his agenda. That is what he wants to get into China. Why it wasn't there from day one we don't know. As soon as 8.1 came out it worked in America, but the phones went on sale in China last week and Apple Pay wasn't turned on.

Leo: I'm actually not shocked. If CVS and Rite Aid won't use Apple Pay I'm not surprised that they won't use it in China.

Ben: There are a few things here. First off, China has a different payment network that's called Union Pay.

Leo: They already have it. Is it a tap to pay style network?

Ben: No, I mean MasterCard and Visa are networks that tie banks to merchants. American Express is separate, American Express is an actual bank. China has the equivalent to MasterCard and Visa called Union Pay. There was actually a rumor before the event that Apple had signed an agreement with Union Pay. I don't know if that is the case or not.

Leo: But they would need to make a deal with the Chinese bank just as they have to make deals with banks in the US.

Ben: They would, and I'm sure there is going to be significant challenges when it comes to government approval and regulation. It's interesting because I want to say that I'm certain that this interception of passwords and stuff like that was a coincidence. Tim Cook certainly didn't fly to China because this happened, but it's not outside the realm of possibility that the Chinese government did it right before his visit to send a message.

Leo: To soften him.

Ben: I mean, it's an incredibly opaque and complicated sort of environment, but as you noted it's one that is critical for Apple. The reality is that Apple is the only western tech company that has a future in China. If you are a service like Facebook or what else you are going to be blocked. If you are a software provider like Microsoft was traditionally you are going to be pirated. Apple's kind of business model where they sell hardware differentiated by software makes them actually uniquely equipped to succeed in that kind of economy unlike pretty much any other western provider. The only ones who have been successful have been other hardware manufacturers like Samsung and stuff like that. Because they are not really differentiated on the software side they are struggling right now. So Apple has a tremendous opportunity there, its super important to them, but on the flip side that means that Apple has a lot more risk in China. You saw what happened with the iPhone. To me it was very hard to see what was happening. Was it a bit of muscle flexing by the Chinese government to show who was in charge? Again, this is pure conjecture because we don't know and really can't know. This is one of the most important relationships in the entire business world to be quite frank, and it's going to be really fascinating to watch it and see how things change. Yeah, it's kind of absurd to speculate how these things might be connected, but welcome to Chinese watching.

Leo: It's really fascinated, so I guess that it's no accident that the sit down with Zhang Gaoli looks like d’état when Richard Nixon reached out to China the first time. It is a business d’état.

Ben: Absolutely. The reality is that Apple is one of a whole bunch of companies that have been impacted by the Edward Zhang revelations where the US has traditionally been very unfriendly to Chinese technology companies for reasons of suspected espionage. Huawei, for example, was forced to give up on the US market, they provide telecommunications equipment. The US market is basically uncompetitive, you can only buy from Erickson because Huawei isn't allowed to compete in the US effectively because they are accused of providing spy tech for the Chinese government. There are tons of examples of that. There is the one where the Chinese government tried to buy a port a few years ago, or buy like an oil refinery, and there is a big uproar in Congress. Then this comes along and says, oh, the US is putting back doors in, and doing all sorts of things, and the Chinese government is like, wait, what is going on here? You are not giving our companies a fair shake and meanwhile you are doing the same thing. A lot of US companies have been pretty significantly impacted in China. Microsoft is having a lot of trouble in China right now.

Leo: Yeah, the Chinese government forbids the use of Windows 8.1.

Ben: Well, it's not just that, they are under this amorphous antitrust investigation.

Leo: That's right, they are being investigated, that's right.

Ben: The same thing with Qualcomm. Qualcomm is facing a billion dollar fine in China. It's one of those things in China, because of how stuff goes down you can always be caught on something and meanwhile in China in general there is this big crackdown on corruption, there is this new Premier really solidifying power or a presence around himself, and so there is a really a lot of uncertainty in general. The other thing for Apple is that they are now very impacted in the Chinese government. It is their 3rd biggest market, its low, if it's not their 2nd already, and it's going to be their 1st in a few years.

Leo: Apple, which is stagnant in the iPad, for instance, if they are going to find growth they are going to find it in developing nations, more even than that, in China.

Ben: The reality is that it's just a size thing.

Leo: Yeah, it's billions of customers.

Ben: I remember when the 5C came out from Apple that was like a month's salary in China. That was so misplaced because the reality is that China is huge, over a billion people, it has massive inequality, if you take...

Leo: If you are in the 1% in China you are one of 100 million. There are plenty of them.

Ben: Right, exactly, or 10 million to be exact.

Leo: 10 million, yeah.

Ben: Yeah, there is a lot of people who could afford Apple products, and in Chinese culture in particular it is very fine and accepted to demonstrate your wealth.

Leo: Show off your objects and things like that.

Ben: Yeah, so there is something where you take out an iPhone and put it on the table and it means something. There is no surprise, the Apple Watch, the first editorial was in Chinese Vogue. You can't really understand Apple in China.

Leo: The cover of Vogue China had the models wearing an Apple Watch. It's no accident then, that when Apple talked about this hijack attempt they didn't use the word China at all. They put out a page that said you could use a browser to detect certificate fraud and warn you. Apparently the most used browser in China, Chihu, does not, but Chrome does, Firefox does, and of course Safari does. So Apple doesn't mention China, they just say just in case you probably should use one of these browsers.

Ben: Right, Apple has kind of improved a lot their public response in China.

Leo: They are not foolish.

Ben: A year ago I think, there was a Chinese, in Chinwa, there was a report about Apple warranty problems and reliability or something, and Apple was their typical Apple and PR, not responding, kind of being like, give me a break. That didn't go over well. Apple had to do quite a bit of damage control, and now when you see these types of things go up in China they are very fast, they are much more, I don't want to say subservient, but that is kind of the tone that western companies need to take in China. It's obvious what a priority it is for them, and from a business perspective very understandably so. It's definitely something to be aware of as far as a risk factor for the company.

Leo: I understand a company's fiduciary responsibility to make money. Apple is a publicly held company and this is a big market. There is a huge number of risks going into China. One that the Chinese would just steal you intellectual property and say thank you very much. That's not likely, but that's what happened to Microsoft. The other issue is how is the rest of the world going to react to an Apple that moves into China, ignores human rights issues, ignores how the factories are run, and just says yeah, we've got a great new market, we don't care. Isn't there a risk?

Dave: They've already been dealing with that, right?

Leo: Apple has?

Dave: To a degree with the Foxconn thing, right? Apple has, yeah.

Leo: Right, after that New York Times expose.

Dave: Those of us, here, we passively support that behavior in Apple. We might complain about it, but...

Leo: Because we use their products.

Dave: That's it, right, so you have a $950 iPhone 6+ if you want the biggest one. That's great, but in order to get that price to $950 they need to have underpaid, by our standards, underpaid workers.

Leo: I don't know if that's the case. I think it probably costs them $150-$200 to make. Somebody was saying that Apple's price model is that you multiply it by 3 and add $50. Isn't that right? Come on, it doesn't cost them $900 to make the iPhone 6+.

Dave: It's R&D.

Leo: R&D, right.

Dave: Right, they've got to iterate on these things. They can't develop an iPhone and let it sit for 6 years, they've got to come out with a new one next year, right? So I think that if they did move that manufacturing into the US or started paying people at Foxconn US wages, which would be totally crazy for a lot of reasons, it would cause a lot of unrest I think. If they chose to do that it would make all of us who complain about Apple supporting unfair labor practices happy and then we would also get to pay the price for that. You know that Apple is not going to eat that cost, they are going to pass it along to us as every other business does.

Philip: This is an interesting case here. There is a lot of pressure on Apple to build in the US and use US suppliers. Of course the reason that they use Asian suppliers is because that's where the good suppliers are, and it's a very well developed network, and you know, everybody uses it. Everybody is paying the same labor costs.

Leo: It's the world factory.

Philip: Right, so I don't know if they are responding to the pressure, but they make one deal with a US supplier to supply Sapphire and the whole thing blows up. It's a terrible, terrible thing. Nothing went right, the company can't deliver on the price they promised, they go bankrupt, they sue, the drag the whole thing into court, and Apple, I'm not sure what they are doing, it seems like they are doing everything they can to keep this company alive, and when it collapses they are still trying to figure out a way to continue to work with them. I just have the feeling that none of this would have happened if they would have been dealing with a Taiwanese group.

Leo: Philip was actually in court in New Hampshire during that. We are going to talk about that. Of course I think about the Moto Maker plant which was opened by Motorola with great fanfare in what was it, Texas? It's closed now, they moved it out of the United States, I think to Mexico. Apple does have one product made in the US, the Mac Pro. I doubt very many of them are made, but...

Ben: It's not just the cost. The cost of a phone is like $4, and it wouldn't be that much more in the US because of the degree that things are automated. We can see that a lot of the manual labor is further down the supply chain. It's all of the suppliers and the entire ecosystem that goes around it. It's like back in the heyday in the US Auto Manufacturer's system it wasn't just the auto makers in Detroit, it was all of the suppliers in Toledo and Akron and all sorts of these places. There is an entire ecosystem that goes into creating these things, and that is entirely gone in the US for the most part.

Leo: It's not just the ecosystem, and I think Philip was going there, it's the expertise.

Ben: Right, absolutely. The reality is that wages have gone up quite a bit. For a high end sort of engineer they are going to be actually almost equivalent. For a factory worker it is going to be of course much lower, but it's still at least double if not more than it was just a couple of years ago and significantly higher than it was 10 years ago.

Leo: But, as you point out, I think this is what you meant, the labor costs on an iPhone are like $5.

Ben: Yeah.

Leo: Not the cost of an iPhone, but the labor cost of an iPhone.

Ben: Right, but that's the final assembly. There is actually labor costs for each piece.

Leo: You could triple that or quadruple it and it still wouldn't add significantly to the cost of making an iPhone.

Ben: Every little bit matters when it comes to the margin and the bottom line, but the reality is that, Steve Jobs said this at some point, that they are not coming back, and...

Leo: The jobs are not coming back?

Ben: Right, and what that had to do with was not because of cost, it's because we have lost that, we have lost the ability to compete in these sorts of things. So you get a Mac Pro, you see those videos, it's highly automated, there are very few people, all of the stuff is made elsewhere and brought in then snapped together. 

Leo: Yeah, it's not really making jobs in the US. I want to take a break, and I do want to talk about Apple Pay. We've got a lot more to talk about. It's great to have Philip Elmer-DeWitt from here. I hope you don't mind, I called you one of the senior statesman of technology journalism.

Philip: Yeah, am I older than you or not?

Leo: A little bit. Not much.

Philip: I just went on Medicare.

Leo: Yeah, you, me, Devorak, and Pornell. Pornell will always be older than all of us, so it's okay. We always have Jerry. Also with us is Dave Hamilton from the Mac Observer and the Mac Geek Gab fest. Did I say that right?

Dave: Yeah, we don't usually say it's a fest, but it a party every time we do it, so that's a good thing.

Leo: And from Taiwan, Ben Thompson from Stratechery. Our show today is brought to you by the folks at Citrix who do Citrix GoToMeeting. You see how we are doing this? I just love modern technology, it's really amazing. Here we can do a show with people all over the world, sit around the table, and gab. Of course we are using Skype which means it's not working very well. If we were using GoToMeeting it would be working a lot better. Maybe we have to think about that. GoToMeeting is the way to collaborate and to work together. It's more than just video, of course they have crystal clear video with their HD conferencing, but it's also screen sharing. That's mow GoToMeeting was born, the idea that you could share a screen with somebody else all over the world, you can collaborate, and you can work together with teams distributed as they are today. This is an incredible solution all over the world at your desk or at your iPad. It works on mobile, it works on Mac, it works on PCs. It saves you time, you get more work done, and you travel less. I love GoToMeeting. Schedule meetings in advance or it's so easy to use that you can meet on the fly. Just press a button and start a meeting. By the way, I know teams all over the world who collaborate with each other through GoToMeeting, they just leave it running. GoToMeeting, it allows you to work smarter, more efficiently, take more control of your time and resources, and it's free the first 30 days when you visit, click the "try it free" button., click the "try it free button, and we thank Citrix so much for their huge support.

Dave, have you purchased anything with Apple Pay yet? Have you tapped your phone yet?

Dave: You know what’s funny is the first place that I used Apple Pay was Rite Aid, believe it or not!

Leo: And it's the last time that you will be doing that!

Dave: It was literally 5 minutes after I did that that we started getting the emails in saying that Rite Aid was going to cancel. I was like, no, it literally just worked and it worked perfectly.

Leo: So what it the...Philip, have you used Apple Pay? Probably not.

Philip: No, I went right down to buy some toothpaste right away.

Leo: Where did you use it?

Philip: You know, I usually go to CVS, but because CVS wasn't part of the team I went to Walgreen's a little further away that doesn't stay open 24 hours, not quite as nice a store, but it worked and then like Dave I found out that this, what is the name of it?

Leo: It's called currency.

Philip: Currency, yeah.

Leo: Currency, and this is a system called MCX that actually I believe created by Walmart and will be adopted by yes Rite Aid, yes CVS, Wa-Wa, and Kum & Go. I've never heard of some of these places. The idea is, get how this works, apparently Rite Aid and CVS have shut down, they had tap to pay, it wasn't even designed for Apple Pay, it was designed for Google Wallet and other tap to pay solutions. What Apple is doing is not Apple only, it's a standard, EuroCard, MasterCard, Visa, it's a standard that is a global standard. Because Rite Aid and CVS already supported tap to pay, I remember that I've used it at my CVS store. Who knew, it worked fine with Apple Pay until they said whoops, we don't want it to work with Apple Pay.

Dave: They are not just shutting down Apple Pay, right?

Leo: They are shutting it all down which tells you how few people use it.

Dave: Or conversely shows how successful Apple Pay is or predicted to be. Despite the fact that it had been out 4 days, basically it came out Monday when we were able to get 8.1, and so it's out 4 days and it's been available, as you said you could already do this at Rite Aid and nobody cared. Now it's been out 4 days, only works with the iPhone 6, right, both of them?

Leo: Because they are the only ones with NFC.

Dave: That's right, and there is no watch yet, so we can't use it with the iPhone 5 and that. Yet, no problem until Apple Pay is here and so they shut it down, this is in violation. It always has been in violation of this MCX which is the consortium I guess.

Leo: Nobody used it.

Dave: Because nobody used it. That's right, yeah.

Leo: So the way that it works, by the way I've got a Google Wallet here on my Galaxy Note 4, and it's the same thing, you add a credit card to it. Apple has a nice feature where you can scan, people say take a picture but you are not, you are scanning the credit card, it sees the number. By the way, one of my credit cards had so little contrast that it couldn't, but on the ones that that it could it would see the number, it would see the name, it would see the expiration date, and all you had to enter in was the security code. It was pretty easy to get a credit card into the Apple Pay wallet, unfortunately a lot of banks are not yet supporting it, so most of my credit cards didn't work; American Express did, one of my MasterCard's did, and any card you have registered with iTunes is going to work out of the box you just have to run the security code. Then it's a pretty simple process, right Dave, tell me how it worked when it worked at Rite Aid.

Dave: Yeah, and this is the thing versus currency right? You go up, you take your phone, you wave it close enough, you can tap the little unit...

Leo: But you don't have to.

Dave: But you don't have to. You get close enough, and the phone lights up, and it shows me my default card, and I could pick another card if I wanted, but I went and set my default card because that's the one that I want to use, you hit your TouchID, and you are done.

Leo: That's really fast.

Dave: 100%

Leo: Do we have, Chad, the video of Needles doing it?

Chad Johnson: Yeah, let me pull it up.

Leo: Because we sent out one of our intrepid reporters, Jeffrey Needles, to the local Whole Worth to buy chicken fingers, and he did it. I think that we have video of the process. Now get this, while you are thinking how easy that was, especially once you set it up, it's really just putting your thumb or your finger on TouchID and that's it, there is no entry. Here's Jeff doing it.

Dave: You don't even have to wake your phone up, right?

Leo: Even if it's off you just touch the TouchID. Pause it right there real quick or go back a little bit so that we can see it. This is the Whole Worth's Veriphone, it accepts Amex Apple Pay. It's got that universal logo that looks like fish dinner with just the bones left. It's got it looks like PayPass from MasterCard, Visa, and Discover. All of those if you had a PIN in them would work, right? If you had anything with NFC you would just tap it and it would work. Okay, go ahead, let's play it because he sees the Apple Pay.

(Video Plays)

Leo: He says what do I do? It pops up, you put your finger on it, you don't even press, and really seconds later you are done, you've got chicken fingers. Okay, get this, and they get a little picture of pumpkins because it's Whole Foods and they are earthy crunchy. So get this, this is how currency would work, before you can go to your Rite Aid or CVS, by the way this won't work until next year anyway, before you can go into your Walmart, or your Rite Aid, or your CVS, you would have to download the appropriate app from the App Store or Google Play Store. By the way, this won't work with all credit cards, just certain debit cards and loyalty cards.

Ben: Actually no credit cards.

Leo: No credit cards in fact. That's right, just debit cards and loyalty cards.

Philip: That was the whole point was to get away from credit cards. 

Leo: That's right, we don't want those, we don't want to give any money to MasterCard. So then you go up to the cash register, they ring you up, and on the screen appears, it doesn't work with NCF, a QR Code. So now you go into your phone, and you find the app, you launch it...

Dave: Before you launch the app you have to wake your phone up. 

Leo: Yes, of course.

Dave: Don't forget that step, right? There is a lot of steps here to do this.

Leo: Then you launch the app and you take a picture of QR Code. The phone chews on it, and says okay, and sends it off to the Cloud for authorization. I don't know how it gets back to the merchant now. Does the merchant have to take a picture of the QR Code on your phone?

Dave: Your phone also needs to have a data connection.

Leo: So you turn your phone around and you say, oh, I've got a QR Code here, and then it goes back. 5 hours later you have paid for your chicken fingers.

Philip: This is such a nonstarter.

Dave: It would be easier to write a check.

Leo: It would be easier with cash or check, but the whole point of this, and this is why Walmart created this; they get your address, they get your phone number, they get your purchases, they get it all, all of the information, and they give no money to MasterCard or Visa.

Dave: Here's the thing, when I used Apple Pay at Rite Aid, with Rite Aid we have a wellness points account with them because it's in our best interest to share our purchase history with them and then we get pretty significant discounts on things like cough drops, you know? So it's worth it, and before I did my Apple Pay thing I entered in my Rite Aid number so I opted in before my purchase, as I do every time, to do this. If say, I wanted to buy something that I didn't want on our thing I could just not opt in and I'm all good. Apple Pay or not, they are not going to get my information if I don't want to do that. So Rite Aid has already got this tracking thing. Yeah, they still have to pay MasterCard their 2 points or whatever, but it doesn't make any sense to me.

Leo: Here's a picture, Dan Fromer posted a picture of his, he says, "Can't wait for the Mobile Payments App from the company that designed this receipt." This is true, if you go buy one thing at CVS you get a 4 foot long receipt with coupons mostly for stuff you have already purchased at CVS because they know. So you say, Philip, that this is a nonstarter?

Philip: Well, a couple of things, first of all I think the killer feature about this Apple Pay thing is how fast the line moves.

Leo: Oh, I like that.

Philip: Yeah, because you know what it's like to wait behind people who are fishing through their wallet for money or they are counting their change. Women for some reason count exact change, men never do. They are pulling out their credit cards. When you see people just sticking their phone there, making their purchase and moving on, and everyone else gets there that much faster that is going to sell the service. The other thing, the reason that I say that it's a nonstarter, and Ben you may know more about this than I do, but apparently Ali Baba used QR Codes for their payment thing in competition with Union Pay, is that what it is called? It's much simpler, but it turned out to be easily hacked. People were putting little Trojan horses, they were redrawing I guess these little robot fingerprints, they were putting Trojan horses in and stealing people's bank information and then stealing their money. The Chinese government in March halted it. They said Ali Baba couldn't use QR anymore. You know, we've got Apple Pay with the most secure payment system we have that works with a tap and everybody is going to move through the line faster, and the idea that all of these companies around going to go back to the QR system that never really took off, it just seems like it is never going to happen. I predict that all of these companies that are supposedly part of this Walmart scheme are going to be trying to get out of their contracts as fast as they can.

Leo: So, it's a privacy invasion, it's a pain in the ass, and it's insecure. What could possibly go wrong?

Ben: Philip just said the key thing though, that's the contract. The umbrella service is called MCX, Merchant Exchange Service or something, and they have all signed this exclusivity agreement whereas the MCX solution, the currency will be the only form of payment that they will take. From what I understand, I haven't seen the contract but I have talked to people who have talked to people who have seen the contract, there are significant penalties for breaking this. So it's likely that CVS, I think there certainly is an angle where they, and merchants in general, are not happy with Apple Pay because they lose identifying customer data which is very valuable and they do sell. People who are outraged at what Facebook and Google track, boy if you ever had an idea of what was tracked on your day to day purchases they would be frankly appalled, it's pretty incredible. That's part of it for sure.

Leo: I think this whole thing was designed by Google to make us feel better about the data the Google collects. You think we are bad, you ought to see these guys.

Ben: I tend to be more sympathic to Google and Facebook on these points. There is this contract here where there is an exclusivity contract.

Leo: That's bad because just look at the list of companies that are using this, Bed, Bath, & Beyond, 7-11, Dunkin Donuts. You are saying that if they have MCX currency that they can't do anything else? Best Buy, The Gap, Dick's Sporting Goods, Kmart, Sears...

Ben: As GT Advanced Technology just demonstrated, you can get out of contracts. I think it will be fascinating to see the sort of pressure that happens here. To me the big kind of news here is buried. I don't think that anyone realized that Apple Pay would just work. I think that merchants thought that they would have to sign up and agree to use Apple Pay. As it turns out if you have the hardware it will just work.

Leo: Because it's really just a standard, it's not something that Apple created.

Ben: Exactly, so you do need the banks, but Apple has understood that they have a lot of leverage versus the banks. From the merchant perspective you only use a merchant occasionally, so maybe some people will avoid CVS and go to Walgreens, but more people are just going to go to the merchant that is closest to them. In the moment of decision convenience will win.

Leo: You can still use a credit card, you can still pay with cash.

Ben: Right, but when it comes to a bank, every time you can't use Apple Pay because your bank doesn't support it, now it will happen so frequently that you will go to the trouble to go to a new bank. The leverage that Apple has versus the banks is a lot different than they have versus merchants which is why Apple is taking the skim off of the banks, not off of the merchants. If Apple understands anything it is leverage, but then you combine that with that by October 2015 merchants need to support chip and pin or else they risk losing the transactions. If you buy a new payment terminal today it almost certainly has NFC because everything will have NFC these days. So the implications are, again they've been operating on the assumption that Apple will just need the hardware there but the merchants need to agree take it, which is not the case, they just need to have the appropriate hardware in place and it will work unless they turn it off. There has been tons of research about if you have someone opt in versus opt out. Anything that is opt in will have much lower adoption than something that is opt out. This is the case here, so at the end of the day I think this is actually a great sign for Apple in that one, there is going to be way more merchants that support them than realized, and two, just the terrible PR bloodbath that CVS is going through right now is going to make people have pause about turning it off because they want data or whatever. It's going to put a lot of pressure on this coalition because CVS isn't going to be the only one who feels the pain.

Leo: People are actually calling for boycotts of Rite Aid and CVS. How much is this going to hurt those companies that use MCX? They aren't going to lose business, are they?

Dave: They could if Apple denies the currency app from the app store.

Ben: No one is going to use the currency app.

Leo: It doesn't matter if they do. What you are saying is ban away, no one is going to use it anyway.

Ben: The competition is the credit card. It's not going to hurt them per say, there will just be people who won't shop there. What it is, what will move the needle, is if retailers who use Apple Pay will actually see a lift. Apple's consistent argument to companies, to music companies, to movie companies, or whatever it might be, is that you are giving up incremental sales because by making it more convenient and easier people will buy more often. You can be sure that Apple will be marshalling evidence. You can see the keynote now at the next NVC, X retailer adopted Apple Pay and their sales went up X percent.

Leo: That's a big selling point for sure.

Ben: No, that will be the selling point.

Leo: Philip, you have said it yourself, you are not going back to that Walgreen's, you did it once for Apple Pay, but CVS is easier, more complete, and nearer. You are going to continue to go there.

Philip: That's true, but you know what, I fully expect that CVS will be using Apple Pay by next year.

Leo: I think so too. This will be a very short order revolution.

Dave: You know, one of the things that keeps coming out that I have a problem with the talking points about this is that Apple is not charging merchants, they are charging the banks, right, in order to use Apple Pay. That is normal for this type of thing, right, the banks get charged. There is a cascade of how things work.

Leo: Because the banks pass it along to the merchant as credit card charges.

Dave: That's it. When you use your loyalty card, right, and we take credit cards for a lot of things, when you use your loyalty card and you get miles, or hotel points, or whatever it is that you get there is a cost for that. There is a fixed dollar cost for what those cost for that transaction and that is passed transparently all the way through to the merchant. I see it on the statement.

Leo: And then from them to us of course. Let's keep the pass through going because we always end up paying in the long run.

Dave: Well they have to, right? Profit margins being what they are it is just how it works. So when people say that banks are paying the Apple Pay fees and therefore not the customers that sort of rings false. Of course the merchants are going to get it, but hopefully with both Apple Pay and more so chip and pin, it's not chip and pin next year, it's chip and sign here in the US for October. When that comes in theory fraud costs go down and then in theory your discount rate goes down as long as you are opting as a merchant into this system and using it properly. So maybe this incremental cost of Apple Pay, which is only 15 basis points to the bank, so it's not a huge number, but still maybe your costs go down, and maybe it's a wash, and maybe you don't really notice it in the end. Certainly merchants and therefor consumers are going to be eating these Apple Pay fees in one way or another. In no way are they going to say that out of the goodness of their heart are they going to eat them.

Ben: The issue is that the fees are the same whether you use a credit card or you use Apple Pay for the merchant. You pay 2.9% in both cases, it varies by credit card. The point is that that is why I think that it is valid that they say that merchants aren't paying anything.

Dave: It used to be that way with loyalty cards. The banks ate the fees and then they said that they aren't going to do it anymore. We are not going to just bake it in to the discount rate, we are going to pass it through. That's how it works.

Ben: Apple is not a stupid company. They are not going to sign these contracts with the banks and then allow the banks to pass it along. I would strongly suspect that these agreements are kind of a most favored nation clause in that the banks can't charge more than their standard rate for an Apple patron's action. I would be shocked if that wasn't the case. Obviously no one is going to see these contracts. I do think that it is chip and pin coming, but regardless everyone is going to need these new sorts of terminals so it will be interesting to see.

Dave: Chip and pin can't come to the US yet. It can, the terminals will support it, but the problem is that we here in the US will have no way of putting a pin on our card because it will require revamping the ATM system, which is why we will go to chip and sign first and then hopefully over time as ATMs get their hardware revamped we will go to chip and pin. October of next year is chip and sign here in the US.

Leo: By the way, it's important to note that the reason that Walmart created MCX and these merchants are doing it is not so much that they want a better payment system. They just want to screw the credit card companies. Mike Doodis quotes former Walmart CEO Lee Scott, "I don't know that MCX will succeed, and I don't care as long as Visa suffers." That's what it's really about, let's face it.

Ben: It's amazing, obviously my site is people paying with credit cards for the membership options, and it is by far my biggest expense.

Leo: Will you support Apple Pay?

Ben: It's more unclear because I have digital content, so if I want to monetize it has to be through a traditional app purchase, which I would love to support anyway. I think that the volume makes up for the fees that Apple charges. I have a lot of stuff to get done before I get an app written.

Leo: Take the money. This is more bad news for the music industry, iTunes sees a huge drop in music sales, at least 13%. That is, given that Apple is the number 1 retailer of music in the world, or at least in the US, that is since the start of the year at 13%-14% a huge drop. Global revenue from downloads according to the International Federation of the Music Industry fell last year 2.1%, so it's accelerating. That probably explains why Apple bought Beats. That's not good news for music sales in general because musicians do not make much money from Beats, or Spotify, or any of these other solutions.

Philip: Didn't we assume that this was what was going on when they bought Beats?

Leo: Yeah, they must have seen it coming, right? The rumor is, and it's not confirmed, that Apple will re-brand the Beats product which is a subscription product and fold it into iTunes sometime next year.

Philip: I would be surprised if they don't keep the Beats name.

Leo: You think so? It's such a strong brand, right?

Philip: Yeah, it's a strong brands with a demographic that they are trying to reach, right? Apple has better numbers than whatever group this was, the International Federation. They saw this coming earlier I would assume.

Leo: I'm sure they have a dashboard on Tim Cook's desk with a downward pointing arrow.

Philip: I'm glad I'm not a musician. It's a tough life anyway even if you, you know. You see these guys dragging their equipment, they don't make that much money...

Leo: Somebody just said that it's karma, that the music industry has been robbing musicians for years and now it's time that the music industry lost money. It's sad.

Dave: Musicians aren't making any more, there is just less money now.

Leo: Nobody is buying music, period.

Dave: Right, and to be fair most musicians, even what we would consider from the outside world fairly successful musicians, never really made money selling music. You would if you got into a decades long career where you really started to control your own stuff, especially with the labels involved, for the first wave of whatever your contract is you didn't make a penny from selling your music. You made all of your money out there touring, or as Philip says, schlepping your equipment, or perhaps paying people to schlep your equipment. Yes, the roadies get paid out of the band's funds and not the label's funds, right? You are out there earning every dollar playing to hopefully larger and larger crowds. The fact is that the money goes away.

Philip: The Rolling Stones made money. The legend is that they learned from the Beatles' mistakes and got better contracts. The game seems to be now to make the money from the venues, to use the recordings as sort of loss leaders to bring people to gather an audience and then you make it from your ticket sales. Even that, though, is tough work.

Ben: That's just the reality of being in an industry where the cost of production of your product is zero. To be clear, creating a CD is always trivial as far as cost go, but there is something in consumer psychology where there is this greater willingness to pay for a physical item then there is for a digital one. If you think about it from a very pedantic sort of standpoint it's actually quite rational because it really doesn't cost anything to create that. I think you will see this with more and more things. It's the way my business works, it's the way a lot of these businesses work, where you will offer a product for free and you get some small percentage of that that will pay for additional content, they will pay for t-shirts, they will pay for concert tickets, they will pay for a vinyl boxed version that costs $100 that has photos, and collectibles, and all sorts of things in it. It's in some ways I think a return to the way music was. Almost the last 50 years all of the money that was made in music, or in newspapers, or in lots of other of these sorts of industries that are being disrupted is almost an accident of history.

Leo: I kind of agree with you on that. The platinum record era was a blip, although I just spent a lot of money to get tickets to see Fleetwood Mac. There is still a lot of money in concerts.

Ben: Well the tickets are because you are buying an experience.

Leo: Yeah, yeah. We are going to take a break. Boy, we've got a great panel, some of the smartest people in the business. Dave Hamilton is here from The Mac Observer. From Stratechery, that's the name of the blog, go there;, go there, buy it, give this man money, Ben Thompson.

Ben: The blog itself is free.

Leo: It's free to read, but then you could subscribe to the real insights.

Ben: Something like that.

Leo: The good stuff. Actually, you know, I'm not a subscriber. I should subscribe because I love the blog. Your insights are amazing. Also here, Philip Elmer-DeWitt from This is a lot of fun, we are going to talk more in just a second. Philip was in the courtroom this week when Apple and GT Sapphire perhaps made a deal. We will talk about that, but first a word from Squarespace, the place to host your next website. Not only the best hosting in the world, but the best content management system. The software and the hardware, they all go together to give you an incredible experience, They are constantly improving the platform, Squarespace 7 I think just launched. You need this, because the web, the standards, the way the web works is changing so rapidly that you don't want to have to think about that or deal with it. Squarespace will do that for you with one of 25 gorgeous templates, every one of them mobile responsive so they look great on any size screen. They all have eCommerce, they are all state of the art CSS, and it's just beautiful. Now, if you are a developer you can get in there and they have a wonderful developer platform. That's the logo designer which is really great too. You don't need to be an expert in anything, you just need to be an expert in your content, your product, and put it up on the Squarespace site. If you want help they have live chat and email support 24/7 and their newly redesigned help site for easier access to self-help articles and video workshops is just awesome. They start at as little as $8 a month and that includes the free domain name when you sign up for a year. They have got free apps like the Squarespace Metric App for iPhone and iPad. It lets you check your site's stats like unique views, and visitors, and even social media follows. You could post with the blog add, make text updates, tap and drag images to change layouts on your iPad or your iPhone. Monitor comments on the go. Gorgeous code, great hosting, never down, nobody can bring it down either, I just love it. I want you to try it, this is the best part, this is how confident they are. Just go there and press the "get started" button. You've got 2 weeks free, you don't need to give them a credit card or anything, just start building that website. You can even import your data from your existing blog. When you do decide to sign up for Squarespace all I ask is that you use our offer code TWIT, t-w-i-t, we will get you 10% off on your new account and you will be showing your support for This Week in Tech. Thank you so much, don't forget the offer code is TWIT.

So, I don't know, Philip, do you think this reflects on the American tech industry, or it reflects on Sapphire, or it reflects on Apple? GT Advanced was offered almost half a billion dollars by Apple alone to build Sapphire Furnaces. For some reason this Sapphire supply was never used, people thought that Apple might use it on the Apple iPhone 6+. Shortly after the iPhone was announced GT went bankrupt. They filed for Chapter 11 reorganization because Apple apparently hadn't used its sapphire and they owed them a lot of money on the sapphire manufacturing plant in Arizona. During the back and forth some information was revealed about the contracts Apple had required of GT, including a non-disclosure clause that had a 50 million dollar penalty for leaking any secret information about their relationship with Apple. 50 million dollars. On Monday apparently they reached an agreement, an agreement not yet approved by the court, that GT would sell the Sapphire Furnaces, and whatever they got, however little, and that would satisfy their debt to Apple which was hundreds of millions of dollars. You were in the courtroom, the judge still needs to approve this, right?

Philip: He was a tough judge, he was very skeptical. He basically warned Apple the week before that he looked at these documents that they were trying to keep secret and he was having trouble trying to justify the security wrap they were trying to put around it. There are a lot of things going on here. I think the $50M per violation of an NDA agreement might be the most interesting piece of news to come out of it. We all knew Apple had some magical way of keeping secrets.

Leo: Now we know!

Philip: It’s not magic at all. It’s $50M per violation. And Zee Tee, here’s the thing: when you file for bankruptcy, you’re supposed to tell the people you’re not going to pay. To whom you owe money and you’re not going to pay them back. And the employees you’re going to lay off. You’re supposed to tell them what went wrong. That’s part of the deal with bankruptcy. And GT does a lot of things. It makes furnaces; what it was doing for Apple was something different. It was actually going to make sapphire. Not just make the furnaces but actually make the sapphire.

Leo: Had it not made sapphire before?

Philip: No. Its business was to sell furnaces to people who made sapphire.

Leo: Oh, interesting.

Philip: So it was really a change of their business practice. And it turned out they weren’t as good at making sapphire as they were at making furnaces!

Leo: We don’t know what happened. There were rumors that the yield rate was, once the sapphire got to the assemblies in China, that the yield rate was 25%. That might be why Apple killed it. Maybe it added significantly to the cost; we don’t really know what happened.

Philip: No we don’t. They finally did file the agreement with a lot of things X’d out. Most of which was X’d out was the amount of the quantity of sapphire and the prices. You have to think that it was a matter of money. That they couldn’t deliver the sapphire at the quality they needed and the price they needed. And it made it uneconomical to put sapphire on the iPhone. That’s the assumption. But, so we have these documents but the main one is something called the Squealer declaration. This is the…

Leo: This sounds like a novel by one of those, like a Grisham novel: the Squealer declaration.

Philip: The Squealer declaration so an affidavit for the CEO of GT Advanced Technologies. He presumably knows what happened and what went wrong. He gave this affidavit and laid it out. And Apple has been trying ever since as a secret. They keep it sealed up.

Leo: So there must be a smoking gun in there although it sound s like the judge doesn’t think so.

Philip: Well the judge may not be sensitive to the kinds of things that Apple thinks of me and keeps secret for competitive reasons.

Leo: Things like how many phones or how many watches. Some of these watches are supposed to have sapphire.

Philip: Well there are a lot of people who like to know what the story is. Not the least of which is the Wall Street Journal which got thrown out of the courtroom when the Squealer declaration came up for discussion. And Dow Jones has a lawyer there every day saying wait a minute; we have a right to know what the story is. And they’re going to continue to fight for it. And the state of New Hampshire, this is the largest bankruptcy in the state of New Hampshire. And the state itself—the assistant Attorney General is there every day saying wait a minute, we want to know why these jobs are being lost.

Leo: Being lost is not in New Hampshire but Arizona and the 650 employees at the Mesa plant in Arizona. Some jobs cut in Salem.

Philip: In Salem, Massachusetts, right you are.

Leo: But I guess since it’s a company doing business in the state of New Hampshire.

Philip: It’s a Manchester company, so that’s where they care. Anyway, I spoke to a lawyer who knows about this stuff at the end of the week. And she was saying that we won’t know until we have a hearing where the judge actually says what his reaction is. Whether he buys it. Whether the stuff that they delivered, redacted agreements, and I don’t think they’ve released any of the Squealer declaration. Whether enough has been revealed about what went wrong for him to approve this deal.

Leo: Right.

Philip: I think they made a strong case that it’s probably the best thing for GT, they go back to the business of making furnaces. It’s probably the best thing for Apple. They’re going to get some of their money back. They’re actually a buyer of these furnaces. They may be bidding on these things. There’s a lot of language in the agreement about how much Apple would have to pay or what the deal is if Apple turns out to be the company that ends up with these furnaces. So anyway, it’s a complicated mess. One of the virtues of moving from New York up to western Massachusetts is it turns out the court room where this is happening is in Springfield. And it’s a 40-minute drive for me. So I get to have some fun as a reporter.

Leo: You and the Dow Jones news surface.

Philip: Correct. Those poor guys; they drove all the way from New York the first day to find out it had all been postponed.

Leo: I don’t feel bad. They’re getting $450 an hour plus travel fees.

Philip: The lawyers do.

Dave: Is that all?

Ben: A lot more than that.

Leo: A lot more? Pardon me.

Philip: There were 36 lawyers in the room all in expensive suits.

Leo: Oh my God.

Philip: You know bankruptcy is not fun and it’s costing somebody a fortune.

Leo: None of this…

Ben: There’s a lot that really stinks here in my opinion. The GT Advance have in their filing more assets than liabilities. So what they had was a liquidity issue where basically they didn’t have enough free cash to pay their bills, even though technically they still had more assets than liabilities. And that’s usually due to a management error when it comes to keeping what’s called working capital. You should always have enough cash on hand to pay your debts. And there’s a lot of people who think just reading around or thought that the deal in general with Apple wasn’t a great deal. And that supposedly some companies turned it down before GT Advance agreed to do it. And meanwhile their stock took off like a rocket. Oh and by the way, their CEO has sold $10M worth of stock in the last year.

Leo: The day before, he sold a huge chunk.

Ben: It was like $700,000. Even in the past year he sold a significant amount. In the year prior he hadn’t sold any. And now it almost, again there’s all these details that no one knows. I think that Philip’s being much more careful about it than I am. It kind of regardless of what happens, the CEO and several other executives have profited handsomely. And they’re out of this contract that they suddenly decided was ownerless that wasn’t ownerless a year ago.

Leo: And Apple is taking probably pennies on the dollar.

Ben: Well not just that. They’re out of the contract with management error. Was that an accident? Like how does this happen, that you make this mistake when it was presumably, you knew it was coming for a while. There’s a lot that stinks here and I suspect this is going to drag out for a while. Whether it be through this hearing or whether it be through shareholder lawsuits. Or whether it be through all sorts of stuff. Because the reality is there’s a lot of people that are out of a lot of money. And there’s no better way to generate a lot of activity around finding the truth than when there’s a couple billion dollars at stake.

Leo: So $450 an hour, that’s not enough.

Ben: $1200 an hour.

Leo: What?!

Dave: These guys are New York lawyers. I hire Texas lawyers.

Leo: $1200 an hour! And there’s 36 of them in a room.

Dave: Well there might be some there at $450. The new guy. Seriously! I know it’s crazy.

Leo: But it’s true. This is like $50,000 an hour just sitting in that court room.

Dave: Probably close to $15-20,000 realistically.

Philip: And they spend a good eight hours waiting for Apple and GT to cut this deal.

Leo: Just cooling their heels.

Philip: They’re just sitting there the whole time.

Leo: There is a class action lawsuit against GT that’s just been filed. Or actually it was filed earlier this week, on behalf of shareholders. So the shareholders want to know, the hundreds of people in Mesa, Arizona want to know, everybody wants to know!

Philip: There were four Asians, Chinese, and Taiwanese? Maybe they were Japanese, anyway four Asians; their company had supplied compressors. 2,000 compressors that were somehow involved in creating the sapphire. I don’t know how many millions, but I felt so sorry for them. You hear it all happening in English. They’re on the line for millions of dollars and they can barely follow what’s going on. Poor guys.

Dave: The emails I get are not what’s going to happen to these poor workers. We get our does this mean the Apple watch is delayed?

Leo: Oh, who cares? Really is anyone really worried about whether the Apple watch ships in January or February?

Dave: Uh, yea. Yea.

Leo: Really? Is there a pent-up demand? I’m just dying to get my hand on a $5000 Apple watch! I can’t wait!

Dave: You’re playing the other side. You know there’s a huge demand. Look at, people lined up before the Apple event at the Apple store.

Leo: But that was for a known commodity that everybody needs. Everybody needs a smartphone. And that was a known commodity.

Dave: Ten years ago, we needed smartphones, Leo?

Leo: No, but that’s ten years ago. Now we need smartphones. Do we really need Apple watches? Really?

Philip: Chinese New Year is coming up and I think it’s going to be a big deal.

Leo: You think it will be on the Chinese New Year, the Apple watch will…

Philip: Ben, wasn’t that your speculation on that’s what the timing is about?

Ben: I think they would have preferred to have it this holiday.

Leo: What’s the next holiday?

Ben: The Chinese New Year is February 19th.

Leo: So it’s right next to Valentine’s Day, it’s perfect.

Ben: I don’t think that will be delayed. I did a little bit of research about this and apparently there was a little bit of… the last numbers I could find was in 2012. And there was a little bit of a clout in sapphire production actually. Which to me suggests that the plant… there’s lot of speculation about whether the iPhone 6 was ever going to have sapphire. To me this bankruptcy and the fact that they even did it suggests that they did want to do sapphire on the phone. This would require a tremendous resource and capacity.

Leo: There’s plenty for watches.

Ben: It’s not even all the watches. The low-end, sport watch-the $350 one-will not have sapphire. So it’s only the more expensive watches. The surface area isn’t that great. And the yields are going to be better because it’s smaller physically. So I don’t suspect this really having any impact on the watch or its timing at all.

Leo: You think you’ll be ready in mid-February? You think that’s when we’ll see the Apple watch? It actually is good timing for… they’d probably like it in the quarterly results for Q1.

Ben: I don’t think anyone really knows how much of an impact it’s going to have on their results. Apple is the iPhone company and will be for the foreseen future.

Leo: We know Apple can make and break a business. I remember from the Steve Jobs biography that when the iPhone first came out, they wanted a hard material for the surface. Corning had developed gorilla glass but had shuttered the plant because there was no market for it. Jobs found them and said can you re-open that plant? We think we could use this gorilla glass you’ve invented. And of course by now I’m sure it’s a huge profit center for Corning.

Ben: Oh it’s massive. It’s not just Apple. They make the glass for everyone.

Leo: In fact Apple never says that it has gorilla glass, does it?

Dave: The low-end iPhone of the original iPhone was supposed to have a plastic screen. Not a glass screen.

Leo: And Jobs saw it all scratched up and said no! As I remember, shortly before launch a month or two ago, they said we need a better material.

Dave: They said we’ve upgraded it. Which was their marketing, which is genius. We’ve upgraded a product that you have but don’t have yet. But I wonder if we’ll see the same thing with the sport version. Now sapphire isn’t cheap but the sport watch to me feels like the one you would want sapphire than more than any other if you’re using it well and if you’re balancing well and doing other things.

Leo: So the minimum price we know-because Apple announced it-is $350. Is that the sport watch? With the plastic band and kind of crappy-looking. The one that they could say it’s $350 but nobody wants.

Ben: I set up in the cellar.

Leo: Right because who’s going to spend more than $150 on such to speculate of product?

Dave: We’ve got these gold ones at the top.

Leo: Which is going to be like five, I mean most people agree, if it’s really 20 for four karat gold, it’s $6,000.

Dave: If it’s $6,000, I’ll buy everyone that I can and sell it for the gold. There is not a single gold… seriously, look around at watches. There’s not a gold watch on the market for less than 10 grand.

Leo: Really! Wow!

Dave: Most of them are in the $20,000 range, yea! You want a two-tone watch. And then you can get into the $4-8 grand range. But if you’ve got real gold…

Leo: Are you kidding?

Dave: No. And here’s the thing, if I guy a gold Rolex today, let’s say. And I’d spend $25,000 on it; in five years, I can sell it for the same $25,000 used. And in 10 years, I can sell it for $30,000. Now, let’s say the gold Apple watch is $5,000 and there’s no way… I’ll eat these words and it’ll be a great meal of crow. Because I’ll have a gold Apple watch on while I do it. But let’s say it’s $5,000, which is not going to be. Now, two years from that day, even two years from now, and let’s say it’s three months from being released—two years from now, that watch is obsolete. The tech in it is old. Worthless!

Leo: I do have to point out that the Ford museum just bought the Apple 1 for $900,000. One of the Apple ones for $900,000. So if you hold it long enough, it could be worth something.

Dave: Seriously, I don’t think they’re going to make very many of them. I don’t think they’re looking to cut into Rolex’s business with this.

Leo: It’s that middle one. Not the sport, no the edition. What’s the name of the one in the middle?

Ben: It’s just the Apple watch.

Leo: No name.

Ben: So I think there’s a few things here. First off, John Gruber and I were on a podcast speculating what if it would be shocking that the Yes One, which is this resin-it’s already this entire system in a chip-worth that could be upgraded. That would kind of change the entire conversation.

Leo: You just swap the inside out.

Ben: Yea. What I’ve heard kind of through the grapevine is there’s this strong suspicion that the middle one you will be able to trade it in. The gold one anyway. Who knows? This is pure speculation. But three, again coming back to the Chinese market in particular, there are definitely people that will buy a gold Apple watch because they can buy a gold Apple watch. And because you will wear that and it will have a lot of status attached to it. It will be very valuable because it’s expensive. Again, I suspect Apple’s going to have some sort of program to deal with the obsolescence. But no I agree; it’s going to be several grand, probably $5,000 or above. And no they’re not going to sell a ton of them but at the same time they’re probably going to sell more than most people suspect.

Leo: I apologize it’s 18 karat, not 24 karat.

Philip: That 24 karat would be too soft. $5,000 would be incredibly disruptive in the gold watch market.

Dave: Yes, seriously!

Leo: I’m in the wrong business.

Dave: Yea, totally.

Ben: I’d be a gold watch manufacturing lawyer.

Leo: Exactly. Now I know why they need to charge $1,200 an hour!

Dave: They got to buy gold watches!

Leo: They got to buy gold watches. So it says early 2015. I guess early to a normal person would be in the first few months, right?

Dave: It could be negotiated as any time before July 1st.

Philip: That’s easy for Apple. You get it out in June.

Leo: Okay. We haven’t even seen a prototype. The Apple watches they were showing off were running a demo. We don’t know what…

Dave: Some of them were.

Leo: It could have been anything. Well Tim Cook’s wearing one; I presume his works. But who knows?

Dave: The one they put on us was a demo running a loop. And it was non-interactive. But the one that the employees were wearing, you could touch it and do things to it.

Leo: It would do things?

Dave: Yea. Now I’m sure there was a limited path you could walk and they knew this path. Which stands to reason.

Leo: They didn’t let you touch it. They touched it?

Dave: I did not get to wear the one that was interactive.

Leo: But you got to touch his?

Dave: I got to touch his, yes. At times.

Philip: Did you press the button?

Dave: I didn’t. And then all these security guards descended on me.

Leo: Was it a good touch or a bad touch?

Dave: What was weird was the haptic thing that was interesting. Because that was on my wrist. But really he put it on my wrist and it’s important to say he put it on my wrist. I didn’t put it on. I think it’s because they want it tight enough for that tap engine to work.

Leo: Interesting, yea. Which kind of band did it have? Did it have that beautiful shimmery metal band? That’s the one I want.

Dave: I tried a lot of them. Of course, why not?

Leo: Why not! You’re there. You’re looking at them.

Dave: I was paying attention to his because that was the one that was interactive. But I knew at some point I would feel these taps. And two or three minutes in, I was like this is a four-minute demo that loops on a watch. He said how come I haven’t felt it yet? It was because I was waiting for a cell phone style buzz.

Leo: Oh it’s not that big a buzz?

Dave: It’s not a buzz. It literally feels like someone’s tapping you with two fingers.

Leo: That’s too creepy.

Dave: But it’s nice. It’s not jarring like a buzz is.

Leo: It’s a nice touch?

Ben: It’s a good touch.

Philip: Are you going to buy one, Dave?

Leo: Obviously! He’s going to buy the gold one.

Dave: I will buy one. Here’s the thing; I’m a watch guy.

Leo: I love watches.

Dave: I own more than I should but I will buy one of these because this is my job. In order for the Apple watch to work, I think it’s going to need to be your daily driver. It needs to be the one you wear 90% of the time in order for it to do all the things that it’s going to do for you. At least for a tracking and fitness thing.

Leo: As a watch buff, you wear a different watch every day I bet you.

Dave: I don’t want to give up on all my other watches. So yea, Apple has a weird thing. They either need to convince watch guys like us to give up on everything else and only wear the Apple watch. That’s one segment of the possible market. Oh and we have to have an iPhone 5 or later. Or they need to convince people that don’t wear a watch to now start wearing one. It’s an interesting little twist they have going on.

Leo: I feel bad for Pebble. I feel like they’re the pioneers in the business and they just can’t… by the way, I’ve been wearing a Motorola 360 now for a month or two.

Dave: Do you wear it all the time?

Leo: I like it, yea. It’s actually useful. You know what it’s great for? Nav as you’re walking, it buzzes and when you have to turn you look down and it says turn left. It’s really great for that.

Ben: That’s the right interface for that.

Leo: It’s perfect. Even while you’re driving you can look at it.

Philip: Ben has an elaborate theory that the real watch isn’t going to come out until it carries it in.

Leo: Because then it could have connectivity.

Philip: Right.

Leo: Already Samsung makes a watch. It looks a little bit like a molded iPhone on your wrist. But it already makes a watch with connectivity, right Ben?

Ben: Yea, it’s feasible. It’s big. It looks ridiculous, huge, and the battery life is atrocious. But no to me that’s the ending here. It’s I think connectivity will flow to and the kind of key thing your wrist will float to the smallest, most personal item that’s always with you. And I think actually in five years or so we will actually have large phones, iPhone Pluses.

Leo: Isn’t that funny that we’re moving in that direction?

Ben: It’s better for everything except for portability. Which leaves a great opening for a thing on your wrist and so we’ll actually use our phones less. The problem now is what’s on our wrist can’t stand alone. But to me that’s okay. It’s okay because everyone is already carrying a phone with them. So it’s not like making your life any more difficult to wear a watch. It’s more additive. But then a few years down the line-so you have the watch in the market, you have developers building for it, you have it getting better. Just like the iPhone got better. Just like Android got better. And in a couple years when technology has improved to the point or battery technology in particular has improved to the point of where it’s viable to have a standalone watch you’ll happen to have an entire ecosystem there. You’ll have the UI figured out. And you’ll end up I think leaving your iPhone in your bag or sitting home more often than you do today.

Leo: I hope that’s true. I’m ready for that. I’m a little skeptical but I’d like to see it. But I hope that’s true.

Ben: It’s easy to be skeptical that we would carry the internet in our pocket 15 years ago. I think it’s just the course of technology.

Leo: Actually you know what. It’s not true. This, the smartphone is a logical procession from a computer. If you’ve seen a Newton 15 years ago, it just made sense. I think a watch is a bigger leap. Wearables are a bigger leap.

Dave: Smartphones make sense in retrospect.

Leo: I have a video of me predicting this exact thing 15 years ago. It just made sense.

Ben: Gene Roddenberry predicted it 40 years ago.

Dave: He didn’t predict a watch, so there you go.

Leo: So Philip was worried that this show, he said it’s not really two hours is it? Philip, are you bored?

Philip: No but I’m getting hungry.

Leo: Alright, we’re going to move right along now. If you want to get some chicken fingers, I know a place. Our show today, good to have you all by the way. Great panel. Great discussion. Our show today brought to you by Let me just check because every time I do this set I like to see. How many? 43,766,976 royalty-free stock images on Shutter Stock. They added nearly 300,000 images last week. And you might say well how am I going to find the image I want? Well they have a great search. It’s a remarkable search. Give me a noun, how about donut? We just had some delicious donuts. Oh, there’s some donuts. Now that’s just the beginning. Because now you can refine your search. I’ve got donuts but maybe I want photos, vectors, or illustrations. Do I want horizontal or vertical images? How about the categories? Do you want donuts with people? How about only donuts with people? In fact, how about only donuts with people 70 years or older? I’m not kidding, you can narrow it down. And with that many choices, you’re really great. You can also choose the color pallet and if you’re a blogger or you have a publication, you’re really going to want to make sure it looks good with your site. I’m a huge fan. They have new, popular, relevant, and undiscovered. That’s always the place I go at These are the undiscovered donuts. People haven’t found these yet. Hidden donuts at They also have, if you click the footage tab, a lot of great video footage. More than 2,000,000 royalty-free stock video clips. If you sign up for Shutter Stock now, you can get free images and video clips every week. You don’t need to give them a credit card. They’ve got music too. Podcasters love this. I’ll tell you though I’ve been noticing in the credits lately in a lot of movies you will see Shutter Stock credited. Because film makers use Shutter Stock all the time. Bloggers, publications; it’s just a great resources for horse-headed people.; I want you to take a look and sign up for that free account. You can save images out onto your… there you go. There was one! There’s an old man eating a donut. I love it. You can save those images onto your like box, share them with friends, all of that free. You don’t have to give them a credit card. But if you decide you want to buy a subscription, we have the 25-images a day subscription and it’s awesome. Do use the offer code TWIT1014 and you’ll get 20% off your image subscription package. That’s a good deal; Browse around, create an account, it’s free to do so. And if you decide to buy, 20% off when you use the offer code: TWIT1014. We love them. By the way, somebody was looking for your podcast, Ben. It’s not called stratecory. That’s the site: The podcast is, is that right? Oh he disappeared. I said he could disappear if he wished. He has a three year-old who is now awake probably. Roku according to the Wall Street Journal deal book is considering a public offering. People briefed on the matter on Friday. They’re working with Bank of America, Merrill Lynch, Citi Group. Because this new Jobs act allows you to do stealth groundwork for an IPO, they actually could be doing this already under the Jobs act. If you have less than $1B in revenue, you can file confidentially. I think it’s an interesting play given that Apple is about to I think explode the Apple TV sometime next year by putting in apps, and app store. You already see people like HBO and now Lionsgate announcing that they’re going to go direct to customers. I think that’s fascinating too. Okay, Ben’s back. What’s the podcast?

Ben: Exponent.

Leo: Dot FM, is that right?

Ben: That’s right.

Leo: People were looking for it. We have a very interesting story that Lionsgate is considering taken some film along with Tribeca Film Festival; and sell them direct to consumers. I think when you combine that with CBS’s announcement, it’s going to stream online. HBO says at some point next year HBO Go will be something you can subscribe to without a cable company subscription. We’re about to see a shift in IP TV.

Dave: There’s one thing that will make that all happen or not. And that’s the NFL. When they allow streaming of games or the ability to watch a game as people can do in Germany now without having a cable subscription. When that goes away, that will be the tipping point.

Leo: Didn’t they stream the super bowl this year for last year? I think they did; I can’t remember if you had to have a subscription or not. If you had a Verizon account you did not.

Dave: Yea, Verizon’s got that deal. That’s right.

Leo: I think we’re very close. The NBA is doing this. They’re bypassing ESPN, or actually it’s with ESPN’s help.

Dave: The NFL makes a lot of money from the networks. A truck ton.

Leo: It’s really Comcast and Time Warner; the big companies you have to fear. They’re not happy about this at all.

Ben: No, I actually disagree. ESPN is doing this but you have to… with ESPN1 you have to either have ESPN service or the stuff they sell directly is for games that are not televised otherwise. So they’re games you can also get through MBA and League Pass. If you get MBA League Pass or MLB or whatever, nationally televised games are blocked out if you’re in the U.S. And the point is to protect those contracts. The HBO thing to my opinion has been way… I do think that change is coming. But the HBO thing has been way overplayed in my opinion. And the reason is because HBO is already only ever making money from people that watch HBO. Like HBO’s not part of your standard cable package; you have to pay extra for it. So it’s a small step to go from people paying for HBO via their cable company and people paying HBO directly. But the fundamentals of their business model have not changed.

Leo: Except that they require currently a cable subscription to watch them. And if you’re going to watch HBO currently, you have to get it through your cable company.

Ben: That’s because HBO doesn’t have the capability of collecting that money currently.

Leo: They’re going to piss off their distributor.

Ben: But HBO like right now Time Warner rejected news corporations bid to take them over. They have a lot of pressure to show growth. So they’re much more motivated to take on these risks than they were previously. The difference with ESPN and any other cable network is ESPN makes money from every single cable subscriber whether or not they watch ESPN. Which means ESPN charges more, like $5.50 per subscriber. So ESPN is making money from all these people that do not watch ESPN. That’s very different than HBO that only makes money from people who explicitly get HBO. So for ESPN to change this model is to forego much, much more money than HBO is foregoing. So HBO I think is way over-played as an indicator.

Leo: So you’re saying HBO goes, then pay attention.

Ben: HBO will be the last to go. Because they have the most at stake in the current system. And that’s why they paid out the nose for MBA. That’s why sports fees are going through the stratosphere because the reality is you see lots of people with the HBO thing. Well I just need sports now, I can cut the cord. Well guess what. Everyone knows that.

Leo: You’re not the only one saying that, buddy.

Ben: Exactly. Sports is one of those things where people…

Leo: You’ve got to watch live.

Ben: You’ve got to watch live. People will pay for it. They’ll pay ruggedly but they’ll pay. And that’s why the fees are so high. It’s not just the advertising thing, watching it live. They’re high because it’s people, if people will pay for cable simply to get their sports. And that’s also why we have these great shows like AMC for example. The Walking Dead, or Mad Men. Or FX, Americans have created this amazing TV. And what they’ve realized is the best way to make money is not to get more commercials; it’s to create must-see shows where you can increase your carriage fee and charge, charge the cable companies. Which will pass on to us. And all this stuff, this great TV we’re getting, is actually a byproduct of a system that we all claim to hate. But actually if you look at it from a strictly economic perspective, it’s actually a pretty good deal.

Leo: How much did CBS pay for Thursday night? And did they make money on it? The ratings were good I think.

Ben: I’m sorry, pay for what?

Leo: CBS pays for Thursday night football.

Ben: A ton of money. It’s the NFL, it’s both the highest rated and the most expensive.

Leo: They won every Thursday night since early September with their NFL broadcast.

Ben: I think they were winning Thursday nights before. But the NFL is so valuable that they just moved it all the Monday night.

Leo: Larry Page is reorganizing Google promoting Sundar Pichai pretty much to his number two man. Although Google’s at great pains to say he’s not a candidate for CEO. But Pichai who originally started with Chrome, I met him when he was pushing Chrome OS. We had a great debate over the future of Chrome OS. And Sundar I’m sorry. I was wrong. I thought there was no future. It’s a browser not an operating system. Little did I know. Now he has research, search, maps, Google Plus, commerce, ad products, infrastructure, Android, Chrome, and Google apps. Is there anything else? There’s YouTube. Susan Wojcicki apparently Nest will stay with Larry Page. But basically Page I think is saying you run this business. I have some other things I want to take care of. He says he’s taking care of the bigger picture. Nothing to say about that; moving on.

Philip: Wait a minute. I want Ben to talk about his theory that Google’s has peaked.

Leo: You are a Ben fan, Philip!

Philip: I am! And this is probably the most provocative thing written last week.

Leo: Google… yea, I loved the article actually. And I think it hurt you to write it even. As you admit in the article, you’re a Google fan, Ben.

Ben: I wouldn’t say I’m hurt per se. If I’m hurt by anything it is to write anything like this is risky. Anyone who accuses anyone like me or Philip or anyone who puts opinion pieces out there of looking for quicks, couldn’t be farther from the truth. I think there’s more risk in being wrong or something like that, to your reputation.

Leo: Now take it from me and Dvorak, being wrong has never hurt either of us. Fend your reputation.

Ben: I’m just going to leave that one. I’m not going to touch it. But basically my contention is not that they as a company are in any trouble. I think that they own search deservedly. They will continue to own it for a very long time. I’m relatively skeptical to people who think their search business…

Leo: But owning a search means a lot less than it did a few years ago.

Ben: It’s like Microsoft still owns operating systems.

Leo: So what. IBM still owns mainframes. So what.

Ben: And the issue is that relative to mobile, relative to connected devices, they own a lot less. Whereas their absolute numbers are still fine; they’re still a very profitable company. And I think this connects to the HBO thing actually. I do agree with you, Leo that there is change coming. The tipping point is probably going to come more from the advertising side where there’s all these new formats we’re figuring out. Like the new Facebook, the display ad in your feed. Especially on mobile; it’s a very compelling ad. There’s Pinterest moded pins. And Pinterest is a massive giant that just only hasn’t even scratched the surface of its potential. There’s advertorial type native advertising. There’s all these sorts of new advertising formats that are way more compelling than display ads ever were. As these are figured out and become more effective and have all the benefits of digital advertising, like the tracking and targeting, and things like that; you’re going to see more and more money move from television. If you take the advertising industry as a whole, the search advertising is $50B. That’s a lot of money. Advertising as a whole is $500B. So if search is only a fraction of that; which means by definition, if a lot of that $500B moves online and Google still only ever has search, it’s not that their business goes away. It just becomes less important just like Microsoft’s PC business never went away. So when I said peek Google it wasn’t that the business is going to decline. It’s that their relative importance in the arena that they compete in, which is advertising will decline.

Leo: I don’t disagree with you but didn’t we say the same thing about Facebook. If they can’t figure out mobile advertising, its’ over. And they kind of figured it out.

Ben: It’s not a mobile thing; the challenge for Google is that there’s a very large exception here. Setting aside YouTube, the rest of Google is all about the algorithm and that’s not just about the search results. But also about the whole way they serve ads, the auction system. It’s all highly automated and targeted. And it’s a great system because people go to Google, they already want to buy and Google presents the opportunity to buy it right in front of them. It’s a fantastic business. However the reason why there’s so much more advertising at the high end of the funnel to use the term, is because a lot of advertising has made people aware. Aware that they have a problem or where there’s a product that fits their needs. Or maybe just making them feel especially when it comes to things like toothpaste. When Philip went to Walgreens to buy his toothpaste, people don’t generally research toothpaste. They don’t compare. They don’t do check-feature checklist. They go in there and grab a tooth pick and don’t think much about it. But that choice has been heavily influence by advertising. And it’s something you buy; toothpaste every month, every year, for your entire life. So there’s a lot of value to these companies to create affinity for a particular brand on toothpaste. This is sort of advertising that Google and Google’s properties are not as good at. Again, YouTube is a big exception here. And I probably didn’t spend enough time. It’s fantastic.

Leo: You point out in the article or adding an addendum to the article. It was probably the best acquisition ever.

Ben: No for sure. It really is Google’s major foot hold in the future. In a very real way, again.

Leo: Well that’s what I wonder is it how nimble Google can be. And I would guess that this Sundar Pichai move is probably exactly related to what you’re talking about. It’s almost like Sundar put your finger there and hold this. Put your finger in this dike and let me, Larry Page, start to figure out what we’re going to do next.

Ben: Also in an aspect they have a ton on his plate. He had like 10 or 12 executives reporting to him which is a tremendous amount of…

Leo: He said all I’m doing is reading reports all day. I can’t do it anymore.

Ben: Exactly. So I would hesitate to read too much into this beyond the fact that Sundar Pichai is awesome.

Leo: And is getting very powerful.

Ben: No, for sure. Yes, they clarified that he’s not going to be CEO tomorrow. But I would strongly suspect he’s, if something were to happen to Larry Page he would be CEO.

Philip: Isn’t there a longer term issue that Google’s got to at some point deal with that their main source of revenue is advertising. And it’s mostly coming from the U.S. and Europe. That’s what’s funding Google. Yet Google is supplying the internet to the whole world and the growth of the internet in the whole world is not in the U.S. and Europe. That’s saturated, it’s in developing countries: China, India, Brazil. Where it isn’t spending money on the kinds of stuff that Google advertises.

Leo: Well and Google doesn’t even have a foot hold in some of these countries.

Philip: Isn’t there a disconnect between what’s paying for the internet and where the internet is growing? Isn’t that a problem for Google in the long run?

Ben: I think there’s a fundamental challenge with all businesses, which is one, just maintain the current business. And two, it’s growing. I think what you’re articulating is a challenge to Google’s growth going forward. I know a Horace Dediu of Asymco has put forward a very provocative theory that it’s a known fact that Google’s revenue growth correlates to the growth of internet penetration. And that’s set to peak in 2015, I think. And he wonders if Google’s growth is also going to peak for the same reason. I don’t know. It’s very possible. So yes, the same thing again, to go back to Microsoft; the issue is not that they were shrinking. It’s that the growth possibilities we’re seeing have become more limited. That’s what limited the stock price in a lot of ways. I think it’s a reasonable thing to ask. That said, search is not going anywhere. I think it will remain for a very long time; the best means of direct response advertising which is advertising that’s meant to elicit a purchase, immediately.

Leo: So it’s brand advertising that you think they’re going to lose; and that’s where the biggest money is spent of course.

Ben: Exactly. And that’s where I think they’re going to have less of a foot hold than people will think. Again, the analogy being Microsoft with mobile; and I think to extend the analogy it’s just because the skills and what’s needed to win in that category is actually a lot different than what’s necessary to win in direct response advertising. And I think Google’s not in as strong a place either from a product perspective. Google Plus, not Facebook. But also I think from a cultural approach perspective; and again it doesn’t make it a bad business. It makes it an amazing business that I’m not by any means trying to sell short. But it does not necessarily mean they’ll be as dominate in online advertising in five years or ten years as they are today.

Leo: That’s kind of the way of the world in technology. This stuff moves a lot faster. Horace has written a lot about the trajectory of successful companies. And it’s changed in the tech business. The cycle is very short now. It’s hard to stay on top.

Dave: The cycle is short. Google are the ones who brought DR, direct response to the web. Prior to that, branding was what it was. And really the web is best for branding. Podcasts are even better.

Leo: Yes, let’s all say that because we all have podcasts. Podcasts are even better.

Dave: It’s true though. Podcasts are even better than the web.

Leo: It’s no accident that Horace, that Ben have entered this market that you and I Dave, have served in so long and embraced.

Dave: There’s no better way that I’ve found it. We’ve been in the advertising business for 16 years now. But direct response works on the web. The problem with the web is you can track the click, right. Billboards still work but nobody tracks the number of cars that crash into them as a success metric. One is one too many. It’s true!

Leo: I don’t know about you but I have a hard time selling brand advertising because it’s hard to measure the impact.

Dave: And we get to thank Google for that. Google was really smart. When they came out with the whole AdSense and AdWords thing, they didn’t sell people on the results of the ad. They sold people on wanting a report that looked good. Which is how people are. So Google built reports that showed you everything, but focused on the one number that Google charged you for. The click.

Leo: Right.

Dave: This was brilliant. And it sucked for us. Because we were previously in the business of brand advertising and it worked. People saw lift, all this stuff was there. And then Google came in and said hey we can bring DR to the web. It’s like no, it’s better elsewhere. Because people, the whole click and then buy thing, tracking the success of an ad by the number of people that click on it is so counter-intuitive to the way advertising and branding and human minds work. And yet, it’s what the entire business wants to look at. And people are wrong to look at this. But it’s total human nature to say oh there’s a number I can finally look at it. We’ve been advertising for hundreds of years and suddenly now we decide that oh the most important thing is tracking the number of people that touched on my ad. No, no.

Leo: Somebody’s ear.

Ben: I think we see a lot of the companies that have advertised on the web traditionally; the real money in brand advertising is in companies like PMG and Tide.

Leo: And they’re buying football.

Dave: It’s a long play.

Leo: They want eyeballs.

Ben: They’re still mostly on TV because it’s, exactly, it’s a long play. That’s a great way to put it in every respect of the word. And it’s also interesting to talk about Facebook and their atlas sort of thing. We talked about all the data from your credit card transactions. Apple, or Facebook, their offer is to connect online advertising all the way to those transactions. And so because it is attractive, Dave’s exactly right. The idea of being able to understand where your money is spent. The whole, the adage. My host mentioned this week, a marker tells you 50% of my money is very effective. I just don’t know which 50%. Right?

Dave: That’s the phrase we’ve been using in advertising for decades.

Leo: This is a whole…

Ben: Any marker will tell you the reason they don’t work is when they stop spending their sales go down.

Leo: Right.

Ben: And that’s still the biggest indicator of the success of advertising.

Leo: This is a whole show I’d love to do with you guys on this subject. Certainly something of great interest to us. But we do have to take a break for a fine advertisement from one of our fine sponsors. You know when Ford was an advertiser, now there’s a brand campaign for Ford. And they spent a couple million dollars in the two or three years they were with us. They had no way to measure. You can’t measure the sales of cars based on podcast ads. But they were very happy because they did research and there’s ways to find out if people are seeing it.

Ben: You know what’s compelling about podcast advertising and why it’s been so successful is that it’s a native ad. And what I mean by that is that it’s in the same format as the content.

Leo: It’s in the same stream.

Ben: Exactly. And I use the word native ad in my article and I almost regret it because people immediately think it’s paid-for articles.

Leo: It has a different meaning.

Ben: But what I mean is I think podcast ads are a great native ad…

Leo: You mean native to the medium.

Ben: Right, so people are working out or driving their car. And yes some people click through it but a lot of people are content to listen to it. And that’s enough. And that gets the job done.

Leo: Right. I’d love to have Ford back, just saying. You know what they told us; yea it was great, it was a good experiment. We love buying podcasts. They didn’t just buy us, they bought many podcasts. But that’s it, we’re done. It’s such a blip when you’re spending $60M on television ads every week. A million here and a million there and you don’t even notice. Chicken feed.

Ben: There’s an efficiency problem.

Leo: That’s the problem. We should all combine into a giant… any time you want to bring your shows here-and Philip you should do a show too-just combine into a giant blob and go back to Dearborn. Our show today…

Dave: The rollup content piece…

Leo: Well it’s happened before but the problem is the reason that you do podcasts and that I do podcasts, and Ben does a podcast, and Horace does a podcast, we’re all bloody-minded individualists. And we make enough money, each of us that we don’t have to worry about it. And nobody is really trying to take over the world. Except Jason Calacanis. He’s trying to take over the world. Our show brought to you by If you’re going to the post office, you’re wasting your time. Because you can now buy and print official U.S. postage on demand from your computer and your printer anytime day or night that you need it. And if you’re in the business of sending out stuff, fulfillment. If you’re sending out brochures or bills, or on eBay or an Etsy seller and you’re not using, you’re crazy! You’re missing out on the efficiency of this system. gives you everything you need. You get the software, a digital scale so you’ll never overpay or underpay postage. They will fill out forms as you work. For instance they take it right from the Etsy website or the eBay website, fill out the forms even international forms. You get discounts you can’t get at the post office. Discounted package insurance in just one click. Print out certified mail, return receipt, international customs forms automatically. You never again will write out the recipients’’ address. It takes it right from the address book on the website. You won’t write your address; it prints right on envelopes with your company’s logo. It makes you look professional. And that’s really the value of Sure it’s going to save you time and money but it makes you look like you really know what you’re doing. I want you try it right now. We’ve got a no-risk offer that’s so fantastic. In fact, probably when you went there you didn’t believe it. Go to, there’s a microphone at the top there. Click the microphone and enter the offer code TWIT; oh I like that, they’ve got a new landing page. And say go. And we got a $110 value here for you. The digital scale is free; you pay $5 shipping and handling. It’s the only reason I can’t say it’s free is because you have to pay the shipping and handling. But they more than make up for that with $55 in postage coupons you can use over the life of your account. That’s awesome. They make up for it with a $5 activity kit and of course a month free of So this is a really great trial offer. It’s one of the best we offer and I want you to try it right now., click the microphone. Look at this; just go to the front page. It says give us a try, you get $5 in free postage. No! Click the microphone and enter TWIT. $55, $50 more and free postage just for clicking the microphone. I think that’s fair. It’s a good deal. You know what, we had a great week. This is some of the stuff you missed if you missed anything on TWiT this week.

Previously on TWiT: I’m mixing my dough. MacBreak Weekly: we have a video that we sent Jeff Needles to Whole Foods to buy chicken fingers. Seize it, pops up your credit card, receipt comes up and you’re done! Approved. Apple magic. Apple magic. High-five for the iPhone. Well a new feature in iOS 8.1 lets you get text messages on your Mac or other iOS device that isn’t your iPhone. So basically it makes SMS act like iMessage. Windows Weekly: Satya Nadella was given that $13.5M just to stick around just in case he became CEO. We don’t really care if he leaves, do we? Oh, a little bit. Give him a couple million. See what happens. Tony, can you go grab some coffee while the big boys talk. Tech News Tonight: a 28-year old man has been sentenced for two years in prison in Japan. The first person in the world known to have received a jail sentence for making 3D printed firearms. TWiT: some assembly required.

Felix Baumgartner’s record has been broken ladies and gentlemen. The Red Bull stratosphere skydiver has been bested by an amateur. He’s actually a vice president at Google: Alan Eustace, senior vice president. A very well-known guy in the computer industry. For three years in secret and private, he has been planning this parachute to break the world record for high-altitude jumps. Google offered to help subsidize it. He said no it would become too commercial. I have the video; let me show you the video. This is so awesome. He’s jumping from a balloon. He worked with a company called Paragon Space Development Corporation. They made his space suit. They just pulled the trigger and he’s floating. Bye bye. Twenty-five miles high on a giant helium-filled balloon. You got to be nuts. He’s 57.

Dave: It looks like a future Darwin award.

Leo: What could possibly go wrong? There he is in his space suit. He didn’t have any Red Bull. All he had was a couple of Go Pros. He pulled the trigger and fell for 15 minutes; broke the sound barrier. You can hear the sonic boom on the ground. He didn’t hear it of course because he was faster than the speed of sound for a while.

Ben: People on the ground could probably hear the sonic boom.

Leo: They could hear him as he’s coming in through the atmosphere. Then he lands, goes flop. And he’s broken the world record. And he did it for fun and for science and not for Red Bull. And I like that. Total fall was 135,890 feet. And that’s pretty good. Apparently it gets hot when you get into the stratosphere. It starts to heat up from the sun. So he didn’t want to move. So instead of moving to flick his radio switch, the ground talked to him on the radio he would just shift his legs slightly to say yes or no.

Philip: You think of it as being cold up there. I was very surprised that it was hot.

Leo: It was, yea. But it gets cold as you get higher. Obviously you get beyond the stratosphere into space it’s pretty chilly up there.

Ben: Isn’t the side by the sun super-hot. Then the opposite side is super cold.

Leo: Well actually that’s right. That’s the problem with space craft; they have to heat it and cool it. Anyway he did this all on secret. I love that. Anybody here have the new Google Inbox app by the way? I want to point out that you should ask for an invitation. Google is trying to reinvent email. And you know what, it’s awesome.

Philip: How do you get an invitation?

Leo: Go to and request one. Some of the people in our chat room have said they’ve got one within a few days of asking for it. If you get one you get I think three invitations. Don’t ask me, I’ve already given mine to Mike Elgin and Sarah Lane. What it does is it really lets you, it’s fast email triage. They’re basing it, others have done something similar. Mailbox was the first to do this kind of swiping to handle a message. And Outlook, we have to give credit to Microsoft invented the idea of sweeping your inbox. But altogether, I am really impressed by this. And I have a horrible inbox. One of the worst. So these are bundles or folders. Anything I want to see here? No, I’ll sweep it, goodbye! If I say oh I want to respond to this later, I can open it and I can either pin it or sweep it over and say I’ll deal with this tomorrow. Deal with this tomorrow. Deal with this tomorrow. And then sweep away the stuff I don’t want. It’s really fabulous. Really fabulous.

Philip: Mobile only?

Leo: No, it has mobile and web. So if you go to, once you’ve set it up with your Gmail account, it will work on the web, Android, and iOS. Here’s what’s interesting; it’s just another interface to Gmail. So everything you do in Inbox modifies your Gmail account. I am very impressed.

Ben: Only works with personal Gmail accounts. If you have your own domain?

Leo: Nope. And that pisses Jeff Jarvis off to no end. But I am really impressed and this is a challenging problem I imagine for all of you and certainly for me. Just a little word of encouragement, thank you. Keep it up.

Ben: It’s fascinating to see…

Leo: It’s not going to save Google. Don’t get me wrong, Ben. Google has still peaked. You’re in deep doo-doo, my friend.

Ben: It’s a much more compelling experience. It would be interesting to see what would work from an app perspective. Certainly there are ads in Gmail, famously so.

Leo: I haven’t seen any ads in this yet.

Ben: Well of course not, not when they launch a new product. I imagine it being a much more effective delivery for ads than a traditional Gmail interface would be. They tested it I think having basically emails, or you have them now in your regular Gmail interface, right? The top thing is an ad; it’s in there, but a: it’s clearly an ad. And b: were it not purely an ad it would be different from spam. Just advertising in email is tough.

Leo: They have and they do this in the categories in Gmail, this promotional; they automatically filter promotional stuff in there. And they’ve been putting ads in there by the way knowing that people look at it. And they still have that. I think that that’s not a bad idea. Just acknowledge hey there’s going to be ads in here. I sweep them. Goodbye. But I guess at some point., the Facebook killer that’s going to kill Facebook by being private is taking another big chunk of venture capital: $5.5M. They know of course that that makes people worry because anybody who invests in a website like expects an exit at some point. So they signed a legally-binding charter, shackled themselves to their manifesto that they would never sell ads or data.

Philip: How do they enforce that if someone else…?

Leo: Do they sue themselves? I think they sue themselves.

Philip: If they sell the company and they have new management, how’s the new management bound by this?

Leo: That’s probably right, they’re not. Maybe though, I don’t know. I’d have to read the manifesto.

Ben: I think the way it works is they are bound by even under a sale, that’s part of it. The bigger issue is that it’s not clear who’s going to want to buy them because they’re not going to be successful.

Leo: So there.

Ben: The problem is to start a social network is already unbelievably difficult. There’s a reason why they’re so valuable because they’re…

Leo: They got some attention.

Ben: … products. But you have the whole network effect to get people on. The problem is because their number one priority is not creating a social network, it’s avoiding ads. That’s a small distinction but it matters. And the reason it matters is because how are they going to monetize? They’re going to monetize by selling premium features. For example, there’s a conversation on Twitter: is your data portable? Well you can pay for it. Well, okay. The problem is that by definition, they are not offering the best possible product that they can because they need to keep something back to sell. Which makes it even harder to get new users because it’s already so hard to get users. And you’re putting yourself behind the eight ball by actually holding back features. There’s a reason why all social networks are ad-supported. It’s because they need to be super-awesome from a product perspective for anyone to even use it. And they need to be free. There needs to be zero barrier for entry for users to get on it. Yes, in the long run you can argue that as you track user experience. But the reality is Facebook is very highly motivated to make it compelling to use because they know they’re adding ads to it and making it more annoying in some ways. Needless to say, I am skeptical.

Leo: The FCC is going to delay the auction of the 700 MHz bandwidth they got back from analog television stations at least to next year. Phone companies are not happy about that. A survey says 40% of internet users have experienced online harassment. 18% in severe form. 72% have seen it happen. What a surprise. Age and gender are most closely associated with the experience of online harassment among young adults; 65% have been the target of harassment. 65%, and young women of course: 26% have been stalked online. 25% were the target of online sexual harassment.

Ben: it’s a dangerous place.

Leo: Screw the internet. I’m going to

Ben: That’s a good example. Ello launched without any sort of locking or any sort of…

Leo: They still don’t have it; that’s a premium feature.

Ben: I think they did add it. It is kind of like you need to have it. I’m jumping in here because I hate to make light; what’s happening on the internet is really whitely and in our little corner of the world is really kind of appalling. And it’s one thing to talk about being an absolutist about free speech and the importance of that when you’re in an analog environment. You have a thing like Twitter where people can generate an untold number of anonymous accounts. And no one knows who you are and it’s anonymous. There’s some very real issues I think that are being raised now. And I think it requires a lot of thoughtfulness.

Leo: They spent a lot of time talking about it on This Week in Google. It worries me because the internet is probably the most important invention certainly of our era, probably of many eras. And yet it is a tool that is being wielded against people, too. And that’s terrifying.

Dave: We’re in the early stages of it.

Leo: I know. And we got to solve this though, right Dave?

Dave: I totally agree. But first cars came out, we didn’t really have roads. Then we had to figure it out.

Leo: And people kept driving into billboards, right? That was a problem.

Dave: Ads were successful back then.

Leo: I want to thank you Dave Hamilton from Mac Observer and the Mac Geek Gab podcast.

Dave: Nice!

Leo: I said it slowly.

Dave: You got it. Start slow, that’s a baby step.

Leo: Baby steps, I’ll work up to full speed later. It’s great to have you, truly. Thanks for joining us, I really appreciate it.

Dave: Thanks so much for having me. I appreciate it.

Leo: Ben, you’re brilliant as always. Love having you. and don’t forget He got up early to be with us but his brain worked even then.

Ben: Glad to be here.

Leo: Mine would not be working that early in the morning. So I thank you. I really appreciate it, Ben. And a hardy thanks to a first-timer on the show: Philip Elmer Dewitt. I am a huge fan. I’m so glad you could be here. I hope you will come back. That two hours went by like that, right?

Philip: Except it’s practically my bed time now.

Leo: Go have dinner! Go have something to eat, you’ve earned yourself a beer. Thank you all for joining us. We do TWiT every Sunday afternoon at 3pm Pacific. Now, we’re in a weird time-shift area here because in some parts of the world we’ve left summertime. We haven’t left it here. So today, it was at 3pm Pacific, 6pm Eastern time, 2000 UTC. Next week, 2100 UTC. So adjust yourself accordingly. You know what, the solution is just watch TWiT all the time and eventually the show will be on. If you can’t do that though, you can download on demand and watch it whenever you want. That’s at or wherever you get your podcasts of course. Stitcher and Podcast and Insta-Cast. And all the different clients. And our own excellent TWiT clients written by third-party developers. And we thank them for doing that. You can also see us on YouTube and pretty much everywhere. But do watch. Subscribe if you can. You don’t want to miss an episode. Thanks for joining us. Thanks for being in the studio; we had a nice studio audience today. You can email if you’d like to join us in the studio. I appreciate it. It is a long two hours especially in those chairs. Oh boy am I getting nods. Sorry about that. We got to get better chairs. Alright friends, thanks for being here. We’ll see you next time! Another TWiT is in the can. Goodbye.

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