Zuckerberg on Facebook v. Apple

Tim Cook, echoing others, recently said “When an online service is free, you’re not the customer. You’re the product.” Facebook’s Mark Zuckerberg took umbrage in an interview with Time:

“A frustration I have is that a lot of people increasingly seem to equate an advertising business model with somehow being out of alignment with your customers,” Zuckerberg says. “I think it’s the most ridiculous concept. What, you think because you’re paying Apple that you’re somehow in alignment with them? If you were in alignment with them, then they’d make their products a lot cheaper!”

Zuckerberg is only partially correct. Apple and Facebook both want to maximize profits but for Apple a key element in profit is increasing price above cost. Zuckerberg’s point is that one way of doing that is to take advantage of market power and raise price against the interests of customers. But Apple’s market power isn’t a given, it’s a function of the quality of Apple’s products relative to its competitors. Thus, Apple has a significant incentive to increase quality and because it can’t charge each of its customers a different price a large fraction of the quality surplus ends up going to customers and Apple customers love Apple products.

Facebook doesn’t charge its customers so relative to Apple it has a greater interest in increasing the number of customers even if that means degrading the quality. As a result, Facebook has more users than Apple but no one loves Facebook. Facebook is broadcast television and Apple is HBO. See my post Why Has TV Replaced Movies as Elite Entertainment for the diagram.

Comments

Many people love Facebook and many hate apple. Try finding someone who loves ITunes for example.

I'd agree that more people hate Facebook than Apple, but I'd suggest the difference is much less than what you imply with this post.

Yes, why is it so commonly alleged that nobody loves Facebook? I love it very much--it makes the maintenance of a very valuable friend and acquaintance network possible in ways that would be astronomically costly without it. I would be willing to pay a great deal for it, but they would have to segment extremely well to charge, because much of what makes it valuable to me is the contributions of those who are quite marginally attached.

And I hate iTunes, but MacBooks are pretty nice.

People like iTunes much more often if they use a Mac; the Windows version is fairly abysmal.

But, note, while people often hate iTunes ... they rarely hate Apple, while using Apple products; people who actually can't stand the systems simply don't use them.

But plenty of people use Facebook while not liking it very much, because "for staying in touch with Grandma and everyone" it's practically the only game in town.

Problem is, of course, that Facebook thus has only purely utilitarian loyalty; if even Google+ [God help us all] got enough mass of Grandma And Random Friends using it, Facebook could see a mass exodus. People do not love Facebook for its attention to detail, its loving care in design and user experience, and its putting users first, as the one and essentially only source of income. Because Facebook has none of those things, especially because Facebook's users are not its customers.)

apple has its fanboys but for most of us, smartphones are a way of getting the internet wherever you are: that is a good thing. apple was one of the first to make it easy. iphones are not great products - what's with the pages of little app icons, who actually uses more than a handful! although i have one, i certainly don't love it, and would happily switch back to android next upgrade.

I think those people who hate Facebook hate it because they don't feel they have much choice but to use it (much like people hate their cable provider). Indeed I think this is the reason people hate iTunes as well. In all cases the hatred is not a reflection of product quality -- in each case one can technically do without -- it's an aversion to being in a relationship where one feels lack of control.

There is an underlying fundamental problem. Are you trying to serve your customers because you want to serve them well? Or are you mercenary in your service? This fault line doesn't even really exist for the hard-core individualist/utilitarian capitalist. The elements of British class comedy that work because of a disconnect between the feudal ideal and the capitalist ideal don't appear.

In the capitalist model, the reason to appear to 'serve well' is because of a repeated game being played, in which customer pleasure results in further transactions and displeasure results in no further transactions (and perhaps reputational damage). The value of potential further transactions is the motivation for this 'alignment' such as it is.

But the inherent pleasure in good service is something else entirely; more similar to the pleasure of the artist. Many companies claim to pursue this inherent pleasure, but act as if they do not. Similarly, many companies claim to produce like artists but act as if they do not. This is one of those interesting reflections on Apple, which seems to have at time actually acted artistically.

Does Facebook corporately want to serve advertisers? Probably not. How about the public who have profiles? Unlikely. They may be aligned to some degree with both; because they need both to continue operating.

Indeed.

I'd much rather buy a phone from a company that wants my money for the phone (ie. Apple) than a company that wants my personal info (ie. Google/Android).

Well then I hate to break it to you, but you're wasting your money on Apple if you think it's buying you meaningful privacy advantages vis-a-vis Google.

Not for nothing Apple is hellbent on getting its own mapping app out there.

Well then I hate to break it to you, but you’re wasting your money on Apple if you think it’s buying you meaningful privacy advantages vis-a-vis Google.

IOS allows you to control what each app is allowed to access. Thus I am able to prevent WhatsApp from allowing Mark Zuckerberg to look at my contact list.

Whereas Android apps always demand access to everything, and you either have to accept that or not install the app.

You could reasonably argue that this makes it more important for Android apps to ask for the minimal set of permissions. After all, an identical app in Android vs iOS wants, say, five truly essential permissions plus one evil permission that is only used for nefarious ends. In Android, the app needs to ask you for that permission up front, and if you identify it as evil, you straight up don't install their app. In iOS, you can just say, "Hey, might as well ask for it. If they deny the permission, they'll still be our customer, it costs us nothing to try to be evil."

If the actual result in Android is that everyone just blindly accepts all permissions, one wonders how much privacy is truly retained in the iOS world -- do people who blindly accept all permissions genuinely pick and choose when the permissions are asked one by one? I mean, maybe! But I'd like to see some evidence.

I do not love either OS's approach to asking for permissions.

Actually, just having switched to an iPhone 6 from Android, I can say from my personal experiment (n=1), on this one thing, Apple IS better - on Android, I just accepted almost everything when I install the app unless it was really egregious and it clearly outweighed the value of the app (and often, with Android, it's really hard to tell what they are going to do from the permissions - they all sound really broad (a flashlight wants access to my contacts?). On the other hand, planning on switching back in a few months, just wanted to try iOS...

With Android, in general you can install your own custom firmware image which has very fine-grained control over permissions, and there are some controls present in the default images, for example push notifications can be disabled on a per-application basis. That said, many apps would not be useful or stable without access to certain functionality. With Apple, a lot of the things that can be done on Android can't be done at all, and so iOS isn't nearly as useful in enterprise applications.

Re: Apple can't charge a large portion of its customers for the quality surplus

Not only is the product differentiated to capture surplus, but Apple captures aftermarket surplus with ITunes, cloud storage, etc.

The problem is that Apple is only perceived as making better products (Google kicks ass, Microsoft's Windows phone is actually quite nice).

Herd mentality is not a good argument for justifying a near monopoly.

Microsoft’s Windows phone is actually quite nice

It's better than the Galaxy or the Iphone IMO. The problem is the apps.

Part of Apple's product is perception.

I remember opening the box on the one iphone I've owned, and the first thing you see is "Made in California, by Apple"

A part of me wanted to return it then.

There's a good general point here but a lot of important complications are overlooked: (1) both Apple and Facebook rely on their users being somewhat locked into the technologies; there would be high costs to switching to a competitor so over time both companies can get by with providing less quality than they would if there was no tech-driven lock-in, (2) HBO cannot rely on its customers being locked in; people drop it and add it whenever they feel like it, so it's not at all like Apple in that way, (3) Facebook is highly tailored to the individual user, it's not just not like the networks, it's the opposite of the networks, (4) the quality difference (perceived and actual) between Facebook and its competitors is much greater than the quality difference between Apple and its competitors (in fact there's a good argument that Apple is currently relying solely on a perceived difference in quality, or difference in quality that existed years ago but has now disappeared), (5) I would not be surprised if more people love Facebook than Apple, or if more people are addicted to Facebook than to Apple.

This makes no sense. Facebook is hugely popular. Sure people gripe about the ads, just like people gripe about Apple's maps or closed itunes market. But Facebook thoroughly dominates its market while Apple is merely one of multiple players in all its markets. Both can be compared to broadcast TV but if so Facebook is almost the only channel getting watched in its TV-land whereas Apple in its TV-land is merely one of the leaders. Apple may be more loved than Samsung, but Facebook is way more loved than Apple. A lot of people spend a lot of time with Apple. Way more people spend way more time with Facebook.

As for alignment, he would have a better argument if his point was that advertisers aren't any more out of alignment with customers than sellers of goods and services. Of course there are alignments and misalignments. The customer wants the social network and maybe the entertaining or relevant ads, not the annoying and irrelevant ads. So far Facebook for all its data is rather incompetent at coming up with the former. But it's so far ahead it can afford to stumble around for a while.

People don't love Google's products? Google has to delight customers in order to get people to use them compare Apple Maps to Google Maps. Apple Maps' goal is to be just enough that people will not go through the effort of using the non-default. Google actually has to convince people to go out and use their apps. As a result, the Google Maps >>>> Apple Maps, Inbox >>>> the default Mail app. I think it is instructive that aside from iTunes, Apple doesn't make many forays outside of their ecosystem and iTunes is garbage.

Disclosure: I own a Mac and an iPhone, because the hardware and OS integration is great. However, third party apps are invariably superior to the default apps included

On some level, it's good to be the product, not the customer. That is a good deal of the problem with being an Apple customer: Apple LOVES its products. Apple lavishes its corporate attention on making its products the prettiest, the fastest, the best-in-class. Apple does not love its customers -- in fact, it holds them somewhat in contempt (this was probably more true under Jobs than Cook -- Jobs was the ultimate in loving the product). So, for example, the keyboard and the screen and the broken notifications model, or the quiet ringer and subtle vibration of the iPhone: these are all examples of customer-oriented features. People WANTED a better keyboard, they WANTED a larger screen, etc. But Apple felt (reasonably), that it would compromise their product -- the smoothness, the aesthetics, the integrated experience -- and so they told their customers to go jump in a lake for like years and years.

Facebook wants to acquire and retain its users, and have them spend ever-increasing amounts of time on its site. It will very happily do anything it can to make you enjoy time on its site. Apple on some level wants you to pay the largest amount of money possible for your phone, and if it happens that some of the features that you pay for don't really end up being worth it to you, hey, they got your cash. Indeed, if you buy an iPhone and find that, say, its native apps kind of suck and then you go out and buy replacement apps from other vendors, Apple gets your money both on the hardware purchase and then on the supplementary app purchase.

I'm not here to say that this is a one-sided advantage for Facebook (and they do have incentive to wring more information out of you that they can use to target ads), but it's not a one-sided advantage for Apple, either. If it were, Apple wouldn't have profits so high that it literally can't figure out what to spend the money on.

People didn't want a larger screen. The 4 inch iPhone was the best selling smartphone in the world. Iphone 6 outsells iPhone 6 plus 4:1. Rumor has it that 4 inches is coming back next generation. Sure, Android makers pushed big phones because they needed a feature they could point to and say "see, better than iPhone", but people actually like fits in pocket and can be operated with one hand.

How tiny are your pockets and hands?

You're nuts if you think that the iPhone 5 screen size is more popular than the iPhone 6 size. Sure, the 6+ size might be a bridge too far for most people (but it's also more expensive, and it's lower popularity might simply be a result of expense. The base models of the iPhone have always been more popular than the ones with more storage. That's not because people long for smaller disk sizes -- it's the price, stupid). But people wanted and continue to want 4.5" and larger screens. They've conclusively won out in the marketplace. This whole narrative where people secretly want tiny screens but evil Android manufacturers forced a false consciousness on them making them think they prefer bigger screens is insanity.

Sure I'm nuts. The iPhone 5 sold 170 million units vs 5 million for the bigger and cheaper Galaxy Note because people bought them by accident. You must be nuts if you think the sub 5% market share of big screen phones is a conclusive victory in the market place. They will only win when manufacturers stop offering smaller phones

5%? The average screen size on a new phone is almost five inches now

It's not all about quality, I'd say a huge portion of their power lies on vanity... seriously, high-end Android can provide an equally compelling experience and in many areas much better than iPhone. That Apple logo is worth a lot to many people, to the point they refuse to try anything outside the "Apple World".

Alex: "Facebook doesn’t charge its customers so relative to Apple it has a greater interest in increasing the number of customers even if that means degrading the quality."

Back when I used to teach managerial economics, I tried to get my students to understand that "quality" is a multi-dimensional concept, that what you think is higher quality might not appear so to someone else. My example (in the early 1990s) was the victory of VHS over Beta in the VCR wars. All the techies pointed to Beta's (slight) edge in audio and video quality to argue that the "lower" quality produce had, to their dismay, won. But what if you thought that the amount of recording time on a single tape was an important quality factor?

In the same way, I suspect Alex, in his comment quoted above, is focusing on his implicit notion of the quality of an experience. But the real question is, "What do FB *users* mean by the quality of the experience?" If, in fact many FB users think the experience is dreadful, wouldn't they quit? Doesn't, in fact, revealed preference tell us that a lot of FB users do not think the experience is a low quality one?

I'm a former Facebook intern.

This isn't at all why people dislike Facebook. The argument doesn't make sense. Google also has an advertising model. People love Google.

Facebook has a PR problem because it pushed the envelope on privacy one too many times. Right now, reversing that trend, and helping users feel secure, is a top priority at the company.

Pushing the envelope on privacy is exactly what Alex means by Facebook has a greater "interest in increasing the number of customers even if that means degrading the quality."

But if a lot of FB users regard "pushing the envelope on privacy" as "degrading the quality," then we'd expect those users to leave. Or, at the margin, FB users *do not* regard the privacy issues as quality degradation. But I repeat myself.

I believe various goverment-granted and protected IP monopolies also give Apple substantial market power. Not just consumer love.

"Facebook doesn’t charge its customers so relative to Apple it has a greater interest in increasing the number of customers even if that means degrading the quality. As a result, Facebook has more users than Apple but no one loves Facebook. Facebook is broadcast television and Apple is HBO."

I think this is the wrong analysis. Facebook has to compete for "customers" (for the attention of its users) same as any other media and analogous to any other form of business competition. And this is why Facebook is continually devoting the vast majority of its resources toward improving the quality of its products -- improving the user experience and exploring new products that might better serve its mission -- as opposed to say enhancing the performance of its ads.

The reason people hate Facebook is not because it is a low quality product... if that were true why would they spend so much time on it? They hate it because it is monopolistic in the service it provides: people understand they have little choice but to use Facebook (if they want to engage with their friends in the way that it offers), and they resent this. Much like they hate cable companies, the government, and other institutions with which they feel they do not have the control that they'd like to have over their relationship with it.

To be clear, Facebook surely invests in enhancing the performance of its ads. My comment refers to the fact that it invests *most* (by far) of its resources in product development.

The analogy to broadcast television and HBO is perhaps apt after all, but it would be similarly flippant to suggest that network television doesn't care about the quality of their product. While broadcast television diverts resources to developing their ads value, they still spend more on product than HBO, because their revenue is much larger.

The difference between broadcast television and HBO has more to do with the nature of the customer base they seek to serve. Broadcast television makes money on ads so it serves them to build product that appeals to the most people; HBO charges subscription so it serves them to play a strategy game based on appealing to a smaller audience each of which is willing and able to pay more.

There is probably an apt analogy involving Facebook with respect to this form of optimization, but it's not about sacrificing quality, it's about building to appeal to the most people.

A slightly out of box answer on this one. I think the future will be in incentivized networks, networks where people will get paid in tokens for popular content and these tokens will have increasing real world value if their distribution is controlled via a blockchain. eg. http://getgems.org/ I'm not shilling for this firm (haven't got any gems myself), but I think after seeing the valuation of Whatsapp and FB, a lot of smart users are going to be asking themselves these questions. Where the elite go, the masses will follow.

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