Jun 1, 2014

Why Apple Bought Beats

To put Beats Music for free on every iPhone 6. That’s the short answer. Here’s my rational.

Note: This was written the day before the announcement for iOS 8. That may render this whole post moot, but here goes…

It’s pretty clear by now that Apple bought Beats for Beats Music, the streaming service and that the headphone business was just an expensive nice-to-have. M.G. Siegler explains that well here. What we still don’t know is what Apple intends to do with their $3 billion purchase. At that price, it’s a pretty safe bet that whatever it is, it’s going to be kind of a big deal.

It’s not that big a leap to assume that Beats Music will come baked into iOS 8. The question becomes, how much will a full membership cost? Currently, an annual Beats Music subscription costs $100 per year, down from $120. Most of this money goes to the music industry. I don’t know exactly how much Beats pays, but Spotify, which also costs $120 per year is said to pay 70% of it’s revenue to the record labels. That’s a base cost of $84 per user per year for the company to offer this service.

Apple could offer a discount (and they probably will for current iDevice owners), but a discount alone isn’t going to drive massive subscriptions to streaming music. Having instant access to any music you want (plus curated playlists, etc) is a wonderful thing. It’s becoming clear that this is the new model for music listening, and eventually it will replace music ownership. The problem is that, wonderful as it is, most people won’t pay for it yet (outside of Sweden at least). $120 per year is a fair bit of cash. Spotify has only 10 million paying subscribers. Streaming music one of those things where you don’t know you need it until you have it, but once you have it, you can’t live without it.

At this point, it’s becoming very difficult to add in essential features to a smartphone. Even the cheap phones now are fast and include high resolution screens. Better camera and thinner just aren’t as exciting anymore. The fingerprint sensor in the iPhone 5s seems almost like a last gasp at adding a new useful hardware feature. Sure it’s useful, but how many more like this can you think up?

Music on demand is that kind of essential feature. It would be as much of a revelation as the camera was on the iPhone 4. Even now, the iPhone’s camera (and UI) is the kind of differentiating feature that let’s Apple get away with saying, “If you don’t have an iPhone, you don’t have an iPhone.” When I sit at a table full of people swiping through their excellent collections of iPhone photos, I look down at my Android phone and feel left out. That’s the kind of effect companies would kill to achieve with their next phone.

A free, on-demand music service could be a killer feature, but at $84 per year, no company can afford to put it in a phone, given that the bill of materials for an iPhone is only $200. Apple will likely sell over 100 million iPhones, so it would cost them $16.8 billion to bundle a 2-year music subscription with every phone, if they paid Spotify rates. That’s about the annual revenue of the entire music industry. I seriously doubt even Apple could afford that.

Of course we all know Apple is not going to be paying $84 per user per year. Firstly, when they show up with a dumptruck load full of money and a 100 million subscribers, it gives them a lot of negotiating power. Secondly, they now have Beats Music and Jimmy Iovine, who have already made the type of deals that Apple needs for the current Beats Music service. Of course, Apple and Beats will need to re-negotiate all the deals with the labels. First, because the deals they made with Beats won’t be valid now that Beats has been sold, and second, because Apple and Beats should be able to negotiate a much sweeter deal now. Why? Oh yeah, that dumptruck filled with money. Currently, Beats Music has about 200,000 subscribers. Apple will be able to promise them 100 million subscribers, 500 times that number. Guaranteed.

How much will it cost them to negotiate a deal for streaming music for the life of the phone? $50 per phone? We’ll likely never know exactly. The point is, it will be expensive, something that could only be justified in a phone that already has very high margins, and something that would be very difficult to pull off without Apple’s enormous volume and Beats’ ties to the music industry. People have been wondering how Beats could be worth $3 billion to Apple. Suddenly, it’s not so hard to understand. If Apple is paying in the range of $5 billion ($50 x 100 million) every year to the music industry, better relationships and negotiating power up front could save them billions every year for years to come. Nobody knows this better than Eddy Cue, who has done his fair share of negotiation with music industry execs.

Is it worth it for Apple? At $50 per phone, built in streaming music would be the most expensive feature on the iPhone. For comparison, on the iPhone 5, the touch screen costs $44, the camera $18. How much value does unlimited access to music provide for the average user? It’s hard to quantify. What I do know is that when it’s time to decide whose phone to jack into the stereo at a party, it’ll probably be one of the phones that has unlimited music. If that’s built into every iPhone 6, I might be thinking, “I don’t have an iPhone”. To Apple, that kind of ownership of music is worth a lot of money.

One of the best aspects is that, simple as it seems, free unlimited streaming music will be a pretty difficult feature to copy. I have no doubt that Samsung will be quick to release their own version, but they’ll have difficulty negotiating as good a deal as Apple with Beats, and it will cut into their already thinner margins. Either that or they’ll have to release something more limited.

The implications for the recording industry are even more interesting. If Apple is paying $5 billion a year to the music industry, that’s already nearly a third of the industry’s current revenues. If the competition follows suit, it’s not hard to imagine the music industry deriving the majority of its revenues from streaming music services.

Perhaps that’s getting ahead of things, but the bottom line is that Apple has discovered a new killer feature to justify their place at the top of the smartphone pyramid. Rather than a piece of technology, it is relationships, negotiating power and big fat margins that made it possible.

Jun 3, 2011

The Inverted Classroom

I’ve been interested in e-learning for quite a while, and I got a chance to develop an e-learning program for ESL learners 6 years ago when I was living in Japan. I’m currently working on a new e-learning program for environmental education, which I’m pretty excited about. Lucky for me, a few recent developments are pointing to the fact that e-learning might finally be ready for prime time.

E-learning has been around forever, without really taking off, but it seems now that an approach combining independent e-learning with focused classroom practice is set to change the way that students learn. The “chalk-and-talk” approach, where the teacher writes on a board while lecturing the class and students carry out projects at home, is still the method used almost everywhere, as it has been for centuries. However, a few new cases are showing what the future classroom might look like. The future classroom will be inverted: students will listen to lectures independently and they will do their projects in class in collaboration with other students and under the supervision of a teacher.

The first case is the Khan Academy, which started out when Salman Khan, a young hedge fund analyst wanted to tutor some of his young relatives who lived in India. Using simple screen recording software, he started to record lectures teaching them how to do math. He didn’t even appear in the lectures. He just recorded his writing on a black board, interspersed with a few pictures here and there, and posted the results to Youtube. Nothing revolutionary, but surprisingly his young relatives took to his lectures immediately and asked for more. Khan continued to record lectures in the same style, eventually expanding to cover the other major high school areas: biology, chemistry, history, and English. When they came to visit, he tutored them in person, but to his surprise, they told him they preferred him on Youtube. When they watched his lectures on video by themselves, if there was one part they didn’t understand, they could simply replay that part, without stopping him and asking for clarification. Video is a more patient teacher than any live teacher could ever hope to be. Since the videos were open for anyone to watch, people outside of Khan’s family began to watch them, and reported back the same positive results that Khan’s relatives had experienced. He soon received emails from parents telling him that their children who had been unable to learn in the traditional classroom and had been considered learning disabled were finally able to learn using his videos.

Realizing he had something major on his hands, Khan quit his day job and started a non-profit organization. After eventually obtaining funding from the likes of the Gates Foundation, Khan was able to create more and more lectures, eventually expanding to over two thousand lectures covering most of the academic classes in high school as well as many other topics. But given that it was the Gates Foundation, one would expect that the operation would become a bit more high-tech, and indeed it has.

Although the lecture format remains unchanged, Khan has been joined by programmers who have created software to analyze student’s viewing habits and check their understanding of material. This makes it possible to check that students have watched the lectures, see what parts they went back and replayed. Further, it makes it possible to see which students had difficulty and pinpoint exactly which material they found difficult.

These capabilities have made Khan’s lectures ideal for introduction into schools, and the Palo Alto school board has launched a test case, introducing Khan’s lectures to one math class to see well it works. Under this system, students will watch lectures independently, and in class they will collaborate to work on problem sets. The teacher will spend their time directly tutoring students and directing students who are strong in one area to help other students who have had difficulty in that area. Using the analytics software, teachers are able to identify exactly which students had problems and where, so they can focus their energies where they are most needed.

Thus, two of the strongest objections to e-learning - that it misses both the mentoring role of the teacher and the social environment of school – have been turned on their head. The teacher will actually be spending far more of their time working directly with students and less time on marking and preparing lectures. Students will interact more with one another, cooperating on projects in class, rather than spending their time listening quietly in class and struggling with problems at home alone. Khan has stated that the materials the Palo Alto school is using are ready now for any school to begin using. Early results from the Palo Alto school are quite positive. For more about this, check out Khan’s brilliant TED talk.

While we wait to hear how this develops there is already strong data favoring the inverted classroom model from a second case involving 850 engineering students at the University of British Columbia published recently in the prestigious scientific journal, Science by Louis Deslauriers and his colleagues.

As written in the Economist:

Dr Deslauriers’s lab rats were a group of 850 undergraduate engineering students taking a compulsory physics course. The students were split into groups at the start of their course, and for the first 11 weeks all went to traditionally run lectures given by well-regarded and experienced teachers. In the 12th week, one of the groups was switched to a style of teaching known as deliberate practice, which inverts the traditional university model. Class time is spent on problem-solving, discussion and group work, while the absorption of facts and formulae is left for homework. Students were given reading assignments before classes. Once in the classroom they spent their time in small groups, discussing specific problems, with the teacher roaming between groups to offer advice and respond to questions.

At the end of the test week, Dr Deslauriers surveyed the students and gave them a voluntary test (sold as useful exam practice, and marked on a 12-point scale) to see how much they had learned in that week and what they thought of the new teaching method. The results were striking (see chart). The traditionally taught group’s average score was 41%, compared with 74% for the experimental group—even though the experimental group did not manage to cover all the material it was supposed to, whereas the traditional group did.

Given these kinds of results, it looks e-learning is finally ready to provide an alternative to the chalk-and-talk approach. Rather than isolating students and replacing teachers, e-learning will allow students to absorb material at their own pace and then apply it in a social context and allow the teacher to escape some of the drudgery of lesson prep and marking, focusing their attention on students where it is most valuable.

Chris does whiteboard animation for elearning at It's Better Media, living in Shanghai, China. Subscribe via RSS.