#2 – The future of direct-to-consumer, the vital importance of … chicken, and the future of food delivery

We discuss the future of direct to consumer brands and the long awaited reclaiming of end-consumer relationships by the L’Oreals and Philips of the world, and why Nuno won’t do “automatic toothbrush head re-ordering” any time soon. We talk about the importance of chicken (yes, CHICKEN!), why CostCo is locking in its production and the future of food delivery, including dark and cloud kitchens. In gadgets, we talk about the Apple Watch and Amazon Alexa.

Navigation:

  • Digitally Native Brands – from Direct to Consumer 1.0 to DTC 2.0 (01:51)
  • The case for product differentiation in DTC (04:11)
  • Innovations in packaging (10:13)
  • Gaining direct relationships with consumers (13:22)
  • Theses in food delivery (16:38)
  • Emergence of dark and cloud kitchens (17:45)
  • Take-out still key in the US (21:52)
  • The importance of the Costco $4.99 Chicken (24:46)
  • Apple leader in smart watch (31:02)
  • After 5 years, why is Alexa barely better? (37:47)

Resources: 

Our co-hosts:
  • Bertrand Schmitt, Tech Entrepreneur, co-founder and Chairman at App Annie, @bschmitt
  • Nuno Goncalves Pedro, Investor, co-Founder and Managing Partner of Strive Capital, @ngpedro 
Our show:
 
Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news.
 FMCG CEOs: 10 Thoughts About The Future Of DTC

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Full transcription: may contain unintentionally confusing, inaccurate and/or amusing transcription errors

Bertrand: Hi Nuno, how are you today? 

Nuno: I am well, and how are you Bertrand ? 

Bertrand: I’m doing pretty good, so today we are going to talk about consumer, consumer goods, consumer tech and we have a few topics from consumer goods to food tech.

Nuno: Yes, and that will make us hungry. So this is going to be an interesting show at the end of the day. 

Digitally native brands – from DTC 1.0 to DTC 2.0 (01:51)

Shall we go in? And to the direct to consumer analysis on digitally native brands. This really interesting article, by Frederick Fernandez, which really puts together a lot of research from ABI and a few other sources on the future of DTC, and he has 10 specific thoughts around it. And , to start with a non-controversial part, I think we will find it difficult to disagree tremendously with any of the 10 points. But maybe let’s start at the beginning, right? So , let’s start with definitions and what it is and what it’s not.

We’re talking about, effectively the direct to consumer or, what we call digitally native brands. So brands that are F in the FMCG space, that are reaching out to consumers in their first instance, through mostly a digitally enabled value chain and also digitally enabled front office in front of the house.

So, a lot of interesting analysis around it. I think let’s start with sort of the obvious ones, and maybe go to the less obvious ones. 

The point that he makes pretty early on is that, what got some of these digitally native brands to be so unique and so advanced, and really to take significant market shares is probably not going to work for the next wave of DTC 2.0. So DTC 1.0 was really focused on price arbitrage, on optimization of marketing, on paid traffic, and effectively there weren’t a lot of barriers created there.

And , if we’re looking at the future of DTC and, some of these FMCG digitally native brands, effectively that will look very different going forward. You need to have a structure that defends you. You need to be back to this point where there are some barriers to entry, et cetera.

I’ll start with one thing that comes to mind quite a bit. Well, I look quite a lot at digitally native brands, on my day to day role, in VC, and we always see these companies, which is like, “we’re going to be the new brand of salt of olive oil, of whatever” that’s going to deliver to customers and we’re going to be the new brand that will allow customers to have, for example , “spices in their home”, and one of the few things, and it all seems a little bit idiotic, but it’s not , because in some ways, the access that people want to have to specific brands because of convenience and a few other things is very well suited for direct to consumer, digitally native brands.

The case for product differentiation in DTC (04:11)

But at the end of the day, one of the questions I always ask, so I’ll start with one pet peeve I have is: what’s unique about your product, right? Are you doing anything around product? If you’re just sourcing it from an existing player in the market, that can actually at some point go direct to consumer.

If you’re not doing anything around product besides packaging and just distribution afterwards, what is unique about your angle? And, shockingly enough, what I’ve come to the conclusion of is most of these new players are still playing by what Frederick would call this sort of 1.0 playbook, right?

They really haven’t thought through what are the attributes of their brand beyond marketing. What are they doing around product? Right? And, in consumer goods, we have to go back to that basic knowledge that the development of a brand, the development of a product, are not the same thing.

The development of a product is actually a complex thing. If you’re doing something that requires certain types of approvals, from the food and drug administration, or that actually is going to be in the hands of consumers, how are you going to innovate around that? So that’s my first pet peeve, which is really, how do these DTC 2.0 plays actually distinguish themselves on product, besides marketing, potentially business model, et cetera.

Bertrand: Yes, I think, interestingly enough, it’s not clear. He talks a lot about differentiating in product, but it’s quite a lot around how do you create some unique advantage. And some of your unique advantages might be around distribution. You have created an insane content and brands that make people want to buy from you because , you will present some specific brand attributes or because your product is part of a bigger system, is part of a bigger whole, and that’s that “whole” that has a true strong business model. So in a way, it has to even go beyond that product.

I think the one product, however unique it is, might be a very difficult game in the first place. You’re right to say it has to go beyond, a non-differentiated product. But I think his point is that it has to go beyond any single product. 

Nuno: Yes. And I think there are a couple of different dimensions here.

One is the notion of traffic and how do you attract traffic to you and how do you build brand? And if we go back, to some of the core tenants of this article, it does make sense that you have content, that you have media, that you basically induce it into this really overall digitally native platform, and you generate a lot of traffic out of it, but in some ways, that’s not a very different playbook from an FMCG brand in general, even one that sells offline and that has other types of presence. So you have advertising that basically grew and spread awareness and other things. 

Bertrand: I would actually disagree a bit, because when you think about Glossier, it’s a great example where: it’s as if they owned the typical beauty magazines and typically the FMCG companies don’t own these beauty magazine, they don’t own the content. Here, Glossier owns the content that people are looking for in the first place, and then is building a brand from there.

So, I think there is a bit more vertical integration he is talking about, that actually is quite interesting and a big change from the old ways of doing business. 

Nuno: Yes, I agree with that. I agree that there is a different angle on the integration and the stack of content. They go into a more fully integrated model.

I do think the next generation of people that we’re seeing, and we’ve started seeing that already with some gen Z brands that are coming to market is  going to come from actually a very different angle. Which he does mention quite a bit as well around forums and social interactivity and social connection and community building.

I think we’re going to go even one step further than that, where the social community, actually is embedded in the product development life cycle. We’ve started seeing a few people and a few brands playing with that, we started seeing a few brands actually use the community also as influencers and social media presence, which is interesting.

And there’s a lot of interesting, companies out there doing some experiments. I think for the time being, nobody’s really scaled dramatically on it, but there’s clearly something around that. So all of that I agree with. I think the social aspect, the community aspects, probably more distinctive, than just generating content.

Because at some point, I do think the classic brands will catch up, and they can generate their own content and they have huge marketing budgets, right? So they do have access to distribution in many different channels in any case. I don’t want to hamper on the product point because , I agree in some details that there is a uniqueness to building a brand and having a multi-product portfolio that is unique.

My point here is not so much that you have unique product, but even in your multifamily of products, you need to have products that really serve a latent demand need that basically is not being served right now. So, for example, we’ve had, paleo diets and ketogenic diets, and they have sort of emerged very strongly in certain parts of the U.S. It’s very clear that the Keto community, I’m part of it as well,the keto community is not well served. There aren’t that many products out there that are very suited to ketogenic diets, that are good replacements for carb heavy products. And for example, I do think there’s quite a lot of innovation that you can do around it. But probably not enough around some of these, I think fundamental shifts in what people will actually consume. 

Bertrand: Yes. You have to build a system, not just a product, but two, it’s definitely getting more niche. I mean, there is the ability to be able to serve much more niche product , at every level : you can finally reach the right people easily, efficiently. You can build your product in an efficient way, even serving a small niche market. And I can see the world actually getting more and more niche, much more efficiently than before. It has to have implication on how you build a business and how you manage brands. Big consumer goods companies have been used to manage brand for long time, but now we are talking about managing maybe 10 to 20 times more brands just to serve the same market size. That will make things pretty interesting in term of they have to build and run as an organization. How they launch brand, how you manage that whole process on how you keep it efficient.

Innovations in packaging  (10:13)

Nuno: One other interesting thing is packaging. I think there’s quite a lot of innovation around packaging that’s probably not super visible right now, but there’s certainly a lot of experimentation even from some of the big brands like P&G, where they’re really trying to create not only packaging that is obviously more environmental friendly, which is sort of, given where we are, a little bit of a no brainer, but also that it’s more economically linked to how you use the packaging itself that we use as the packaging that it comes in by itself.

And there’s, I think a lot of interesting innovations around that, that we’ll see going forward. So even the dimensions of the physical world and the metaphors that we have today on how does a detergent packaging look like? How does a soap packaging look like? Et cetera, I think will change quite a bit going forward.

And that’s certainly another type of innovation that I see that, that does link to, again, the product and how it’s actually consumed and used by, by end users. 

Bertrand: Yes. On packaging. I see two interesting trends. One is you have to think differently. Packaging when you go online: it doesn’t make sense to use the same tricks to package your goods when you go online versus offline. Online, it’s all about the pictures on the website. it’s not about the picture of the box itself. Actually, you want the box as super efficient as you can: it costs you less, you can get more volume, you can optimize everything.

So you want to optimize very differently. And also being more conscious about recycling of the box, how easy it is to open it. So I think that’s one piece of the game in term of packaging. The other piece I found interesting was: some new companies that are trying to say, you know what, actually let’s take your cleaning product:  it’s 99% water. Why keep shipping water, let’s just ship you the active ingredient and you mix it with water. 

And we have changed the volume equation, weight equation, and therefore cost, hopefully for consumers, dramatically. Being more efficient is better for everyone, for the costs, for the planet, for everything. So I think that’s also another angle that probably kind of resonate more, online where you can think more carefully about your choice and when you also prefer that efficiency at every level; versus offline, where maybe you just wanted that stuff to bring it home without thinking. So that’s for me another interesting piece of packaging, and going back, for me where I was interested was this analysis that  for the past three years and a half, nearly 46% of all deals carried out by the top FMCG companies included DTC / digital assets, and I was quite impressed actually. It means that they all understand that the writing is on the wall and obviously you don’t just acquire, you also build internally, but acquiring makes a lot of sense. You bring, the right type of resource, you bring a new mindset, you bring a new business model. So, the bigger companies are starting make to sense of all of this, and becoming stronger and stronger.

And as we started the discussion, the DTC 1.0 won’t work, is probably dead now, because you are not alone, competition from other startups is big and also the bigger companies start to know the game. 

Gaining direct relationships to consumers (13:22)

Nuno: But one of the things I’ve found actually quite a funny when I was thinking about this, is we look at all these brands as fundamentally consumer brands, right?

The L’Oreals and what they sell, et cetera. But in some ways it seems like because of their overuse of channels and in particular physical channels and distribution, they’ve become almost B2B2C, which is funny because I consume it, I want that brand. But in some ways, the brand back at the center doesn’t know much about me.

They have no clue who I am. They have very little knowledge of my usage patterns on it, which is almost counter sensical to the notion of consumer. Consumers should be: I sort of touch the consumer, and I know who they are. So it’s almost like I have a brand ownership of the consumer, they really want this specific product, but at the same time, I really don’t have ownership of the consumer and understanding what the hell did they actually want over time? So, it means I then need to do a lot of what I’d call ad hoc measurement, where I need to get embedded in specific retail facilities, where I need to do a lot of measurement: outside surveying, focus groups, et cetera. And the beautiful thing of this new world is actually, if I start linking stuff to some of the products I’m consuming, it actually starts basically passing some of this information directly to some of these companies. 

This is not like a classic FMCG example, but having now, a smart toothbrush, obviously now Phillips knows a lot more about me than they did before, a lot more because they see my pattern and unless I do not share it with them, right? They will see that there are very specific patterns of my usage. What are  the toothbrushes that I use the most? What sort of things am I optimizing for? What are my habits? How do I sort of replenish it, et cetera, et cetera. So I wouldn’t underestimate , the push that we will have from some of these household brands that are with us: the Pepsi’s, the Coke’s, et cetera of the world to, at some point, reclaim full ownership of these users by using the channels. And that might mean that some of these direct to consumer plays, probably some of these 1.0 ones will stop having the right to exist at the end of the day.

Bertrand: I think it’s more than reclaiming, actually. I think it’s claiming because  they have never been in direct touch with the consumer. I totally agree with your point actually, that they are truly B2B2C businesses, that’s what they are. When you are not connected to the customers, that your client is actually, these distributors, resellers and all the like, you are in indirect touch to customers.

And I agree with you, it will have to change. I think the writing is on the wall. You have to be much closer to your customers, and that’s how you are going to deliver better product because you are closer to them. And as you say, you might co-build with your customers, as long as you are careful that your customers are really the end consumer. And for me, I see some interesting parallel actually with some of old, handset manufacturers who believed that their customers were the telcos, not the end consumer. And I think that’s what ultimately destroyed Nokia and destroy Blackberry. When Apple started to say: no, the true customers of my products are the consumers, they are not the telcos, and I’m going to make sure they have no say in my products. 

Thesis in food delivery (16:38)

Bertrand: So let’s talk about food Nuno, both of us are Europeans, love food, maybe too much, it can be dangerous for us. But it’s a great topic, and I think the industry is moving pretty fast right now. You have all seen these food delivery companies, you have heard about these dark kitchens, and  today we have two interesting topics and articles. One coming from an interview from Prosus Ventures which is a new name for Naspers Ventures, and another one about Costco. So you could argue it is more old school but it is very interesting to see how “old school” is actually reinventing themself. 

Nuno: Yes and the interesting thing obviously, Larry Illig at Prosus, the interview is quite interesting but obviously it represents their thesis: it represents the thesis of an investor and it’s a very significant thesis. They’ve invested very significantly in this area around the world . So, for me the key aspect of the thesis here is: the world is going to be food delivery, people are going to cook less and less at home, and it’s going to be cumbersome, complex, and so delivery needs to be delivered so to speak, no pun intended, in a way  that actually is much more cost effective, right. 

Emergence of Dark and Cloud Kitchens (17:45)

And in that world we see the emergence of dark kitchens and cloud kitchens as we speak that make a lot more sense economically Where we have the recipes of regular restaurants even a french has restaurants and fast food restaurants 

Bertrand: And sorry to interrupt but there was just that news that we saw Travis who received 400 million in financing from Saudi Arabia a few months ago actually but it was not public until a few days ago 

Nuno: Yes. So very significant real estate plays in cloud kitchens, very significant occupation of space, but at the same time what this will give is the ability to have a lot more capillarity. And what I mean by that is that you can serve smaller and smaller circles of people, and that means that delivery time gets significantly decreased as well, and the costs of it also will get decreased over time. So for me it’s fascinating, because this is a huge fight if we think about it. And this article is really the interview of a person that has a very specific thesis in representing his firm’s specific thesis. But there have been opposite plays: there is the opposite play of saying that the home and the kitchen needs to be made more and more smart, and that the home and the kitchen actually will have more people cooking. Actually even more than that we’ll have not only farm to table, we’ll have front of your kitchen to table right, or your backyard to table. And there’s a lot of companies betting on this and there’s a lot of investment around some of these spaces. From smart ovens that have delivery linked to it etc, many will point out to a relatively significant failure of scaling in the meal kit industry, but at the same time if we looked at pre-prepared food, the jury is still very much out. And if we look at some of these smart devices the jury’s still out. So again there is a couple of worlds competing, that will either co-exist or one of these worlds will just totally dominate. The thesis that obviously Prosus Ventures has, is that delivery will win because it’s more practical it’s more logical it makes more sense, and they are making a comment that it’s like making your own clothes: you just buy your clothes so why would you make your own clothes, and food will be like that. But these two worlds are in a fight and it’s not a fight that I think is clear to me at least, that is totally decided yet. 

Bertrand: If I take the clothes analogy, I think some of it is wrong because: it’s easy to say, it’s a good sound bite for the journalists, but when you think carefully clothes factories, you could have just a few factories in a country, or actually in another country from where you live, and it all works out very well. In the food industry actually as you just said, you have to have very very local center of production to make that food high quality and fresh as long as that’s your target market, and ,so I think it’s a good sound bite, but I don’t see that happening. Actually the way he is describing how each market in one city, is actually made of dozens, if not hundreds of sub-markets, it’s actually complete opposite of the clothes industry  and it’s not just about efficiency of delivery so that you get your food fast, actually if it takes too long to deliver the food will be pretty bad, when it’s cold, but too the ingredients some of it not survive well such a long trip. So it’s quite critical to be actually quite close to the consumer which is again very very different from the clothing industry. So I feel it is good sound` bite but I’m not really convinced by that fact alone. And I think another piece is: what works in India, does it truly work in China the same way, does it truly work in France, does it truly work in San Francisco the same way, or in Minneapolis? I’m not clear because the density of the cities are very different, the cost of manufacturing food or delivering food, or buying food are all very different. And so I think there would be some very very strong difference, at the very least by country, and even at a country level at city at city level or state level, that will make the whole scalability of that business, for me very questionable in a way. Will we see another, like an Uber, that can truly go at scale worldwide or will we see a collection by country? My take personally is that we will see more the later at least initially, because scalability is so hard in food. 

Take-out still key in the US (21:52)

Nuno: Sure, and a couple of important side effects of this. One a lot of people forget this, but for example the take-out market in the US is still incredibly big. And it’s very difficult to see any entrepreneur pitching on take-out. I’ve seen maybe a couple this year, out of all the food companies that I’ve seen, but take-out is still huge in the US.  So I think there is a couple of dimensions on how people get their food and take them home, and we’ll get to the Costco example which you could sort of say is a type of take-out or at least I pick it up and take it.

Bertrand: It is take-out, take-out chicken. 

Nuno: And it’s definitely very contrasensical trend because it hasn’t really abated that dramatically. The second thing is what’s the role of restaurants in this space . Real restaurants that have front of the house, that have waiters, or maybe they won’t have waiters in future, but at least where you can go and sit and have an experience. Again we see that these retail spaces have diminished dramatically, certainly in the US, and that there is a crisis going on for a lot of these restaurants to stay afloat. So I do think there is a little bit of a discussion on what was going to be niche in the future: is niche going to be restaurants and home cooking, and delivery’s gonna to be mainstream because the costs will come down and that’s the way to go. Or niche is going to be actually delivery and restaurants and then home cooking’s gonna take over as the mainstream play I do think the jury’s still out I do think it’s also very clear that delivery can only go up. Because once we start thinking about costs, and you can start thinking about the presence and basically having access to specific markets it really has to go up. 

Bertrand: The question is probably how much can it go up. And without delving too much in the restaurant industry, I read some interesting article about the industry in San Francisco, and when you look at it, it’s insane the cost of employees just keep going up non-stop, thanks to California and San Francisco ordinance, meaning the cost of food has to go up meaning people cannot afford to go out, it’s as simple as that: the price have increased more than 50% to go out to for restaurants in the Bay area in the past five years. Salaries have not gone up by 50% in five years

Nuno: And the rotation of staff because then staff if they can’t actually get accomodation within like, I don’t know, even 30-45 minutes of where they work even at best one hour. 

Bertrand: Indeed.

Nuno: They can’t keep these jobs. They need to go doing something else, and many of them end up doing Uber, and doing Lyft, and doing other things, that allow them to be mobile in and out of town, and maximize their time and that does generate a huge crisis. 

Bertrand: Some entrepreneurs explain that it’s six to twelve months to open a store in San Francisco, how insane is that ? I don’t what to do too much SF bashing, that’s not the goal, but there is something seriously wrong, and if you wanted to kill every small business as fast as you can, San Francisco is definitely on the right track. I’m not sure if it’s right for anyone, but that’s the track we are in, and I think that food delivery is in a way taking advantage of that. 

Nuno: Of course, it’s an arbitrage play. 

The importance of the Costco $4.99 chicken (24:46)

Bertrand: Going back the other article today, the one about the Costco $4.99 chicken, it’s a very interesting read: it shows that, providing price that are below cost, it’s not something new from the on-line industry, it’s has been there all along, as long as you can sell some other stuff to the clients and make up for it.  

Nuno: Costco is a fascinating company. Before we go into it, this analysis on chicken what happened? So chicken has become hugely popular in the US, and it just keeps going up, and it’s like beef seems to be going down, which is interesting because I don’t think that’s totally intuitive.  

Bertrand: Personally I have eaten less beef for health reason. 

Nuno: I have as well, but certainly it’s not obvious that chicken is so dominant in terms of consumption, and we recently had the discussion around this with another group of people, and one of the discussions we were having is what sort of drives this? Is it economic? Is it  people want to have a better well being and they want to consume less red meat? Is it just cost, just sheer cost? Because obviously the cost of chicken can be significantly lower. It’s good for the environment, in principle at least better. But what is  sort of driving this? And  I sort of got caught in this chart at a high level and then we’ll talk about the fascinations of Costco. 

Bertrand: Yes, I guess personally it’s a mix of health and cost: it’s simply more efficient  to grow a chicken and manage that, and at some point the industry is pushing that, and giving reason to people to eat more of it. In the past you could argue that it was a good sign, it was a sign of wealth if you could eat beef every night. Now I guess no one care about that. So going back, what’s interesting is not only the price strategy where it’s a money losing chicken for Costco. You could argue it’s just a way to acquire people, and it’s doing marketing with your own product. But what’s also interesting is to see how far is Costco willing to go in terms of vertical integration. For me that’s really interesting. We talk about Amazon Basics for instance, but it’s just like re-stamping some product with an Amazon name and maybe making some quick decisions on product. But here it’s like: we are going to feed and raise chicken ourself or mostly ourselves. 

Nuno: Yes, and that’s incredible. And I think Costco is a fascinating company because of that, because they went counterintuitively on business model very early on, in terms of really having sort of this membership, and all the links that a membership does create which are obviously very positive: it’s recurring revenue, it gets attachment to the brand, it gets people to come back into the store. The fact that they actually were not focused so much on what I would call the lower end  of demographics but actually that they were focused more on the middle class and even sort of upper middle class, it’s actually an interesting demographic analysis to look at what Costco members look like over time. 

But really the chicken has a loss leader is a very unique play. 

Bertrand: You couldn’t guess that one.

Nuno: It’s like why, and apparently it is, and it is a take-out mechanism. We talked about take out when we were talking a little bit about the higher level trends around food delivery. Take outs probably not going to disappear any time soon, it does create traffic into the store, people do want to then consume a bunch of other stuff.

Bertrand: Especially if you have another business model, if you can have a business model where you don’t depend on your food sales.

Nuno: And you totally locked it in, and it’s fascinating to me this company, maybe at times one of the most under appreciated companies in the US. We talk about the death of retail and these guys just seem to keep going at it. So I don’t think there’s a death of retail, there’s a death of a lot of retail, but there are certainly formats and business models that still very very much work in this work space. 

Bertrand: I think there is a death of dumb retail, and maybe I’m too strong about it, but if you haven’t done something really really smart and right about how you manage your costs, how you manage your value proposition, how you distribute your product, how you go on-line, then yes life sucks, it’s hard.

Nuno: It’s a little bit like build it, and then they will come, was always the adage of retail, and reality it’s a little bit the other way around which is: how do we bring costumers in. So bring them and they will come for sure, but certainly not build and they will come , and I think Costco shows that perfectly with a lot of interesting innovations around: their membership scheme, the products they sell, the SKUs they support, how they support their costumer experience, how they go through payments and how they think through payments. We won’t talk about that today, but there’s certainly a lot of interesting things they’ve done about that. And then how they put these products forward, right? Their hot dogs and the chicken, chicken et etcetera. 

Bertrand: You know they even have their gas stations When you go to Costco it’s another reason to fill your tank at reasonable price, they are not trying to overcharge, so you know, actually it’s a good idea to go charge your tank.

You can get tires. It’s incredible, well run, well oiled business.

They are doing things that are not obvious, in term of how they run their business and I think that’s the secret. Every business, not just in retail, has to have some very, very special secret sauce. And if you look at the competition in many industries, each one of the leaders have their own secret sauce. You don’t have two or three with the same secret sauce, [ because first it’s secret and two obviously one will have a better way to run that secret sauce. So have to find your secret sauce and evolve it, obviously over time and  based on new technologies and new, consumer trends but you have to have your secret sauce.

And reading this article it’s clear that Costco has one, vertical integration in a way that actually remind me of Apple. And no I’m not just an Apple fanboy, finding [Apple in every industry, but that vertical integration, willingness to go very deep, it reminds me of an Apple that is going to buy aluminum at scale in such a way that no other consumer electronic manufacturer can buy aluminum anymore, because Apple has lock up supplies for potentially years in some case. So, I think we are seeing some of this mindset of: we have to go further,  and the easy way to just – buy low, sell high – doesn’t work that much or that easily anymore.

Nuno: So to end this section, we just learned chicken as a moat.

Bertrand: Indeed

Apple leader in Smart Watch (31:02)

Bertrand:  We have this analysis coming from Strategy Analytics, showing that Apple is a clear leader in term of smartwatches worldwide, reaching 51% market share. That’s really impressive. Of course it’s market data that is not coming directly from the manufacturers themselves.

So it’s an estimate. I guess the estimate is not far off. At least in that Silicon Valley bubble, I am not seeing too many smartwatches, not made by Apple. But we all know we have to be careful about just looking at what’s happening just around us.

When you see the range of watches coming from Apple, you can find multiple generation of smartwatches, bringing many different price points. I think the first entry-level for an Apple watch is $200. When you see the level of innovation, year after year, coming with the Apple watch. This year was insane. I was not expecting to buy a new one, and then here it goes again. 

Nuno: So how many Apple watches do have?

Bertrand: I got all of them.  

Nuno: Ok, so you beat me on that. 

Bertrand: I got all of them, and one lesson I learnt, is that I stopped buying the most expensive one, meaning in term of material.

I don’t care anymore, because if I’m changing every year, I’m not going to spend as much for a nice band or for a nice material. What I want is the best watch every year. But the thing is, there was a good reason. I mean, last year was much bigger screen – made a big difference, much more easy to read.

Now the screen is always on. That’s a huge difference. I don’t have to keep moving my watch like a crazy guy just to check the time. That was a true, real issue. And for me it’s pretty interesting because with this year Apple watch, we have reached a new stage in watches: is that everything is there.

 We can talk to it. It has 4g, it can stream music, it can geolocate you, it knows your direction, now there is a compass integrated, there is a barometer integrated, and it works as a true watch, meaning it’s always on . So for me, it’s pretty exciting, Apple has put a bar very high for a device that is not so expensive actually. 

Nuno: So for me, a couple of points. I think it’s clear that they’re dominating the market. I only have the first gen, something strange happened, which is I lost a lot of weight and therefore my band, now actually goes around the watch a bit. 

Bertrand: I can give you a band.

Nuno: You should give me a band. You know, the mark for me was actually, do I buy another band? And I never did. And so, I think at some point I will buy an Apple watch. On this one, I’m, rather than a first adopter or a very early adopter, which I normally am , for every other type of technology in this case, I think I’ve been a bit of a laggard, and do wait to get there.

The interesting thing for me is a couple of things. I think people that still like objects as a mark of jewelry, for men, for example, watches are one of the few jewelry pieces you can carry. I used to live in London, the other one was really cufflinks, here in the Bay area that’s not very typical. 

Very little, very few. I saw someone the other day, but he was obviously English. And so at the end of the day, I think that’s still a manifestation of jewelry or something that is very unique. So I’m not sure that those things will all go fully away.

And it’s very good that’s case. You know, I’m a huge fan of the Patek Philippe’s, the Breguets and all these amazing, amazing watches.

Bertrand: But the growth is going for these guys. 

Nuno: They’re absolutely gone in terms of growth. It’s really become very much a niche play. The interesting piece about this that I would sort of take out of it, and we’d be great to see your opinion as well on it, is I do think we start seeing a little bit the unbundling of input and output, which I do think is actually going to be a mega trend 10 years out. Which is the mobile devices I think are going to be looking very, very different than we have them today.

And so. That watch actually emerging as a significant device is going to be interesting to me, because it’s certainly something, that’s smaller, that’s with you, can be with you almost all the time. And can get a lot of the information that the smartphone would get. Obviously, it doesn’t allow you to do incredible photos, it doesn’t allow you to do bigger screen consumption. 

But it’s, it’s really, really powerful. 

Bertrand: Nuno, as an Apple watch user of every generation. That could have been part of my analysis initially, but even five years in, it has improve dramatically, but still it’s just really truly limited in term of what you can do with it, just because of that screen size, there’s only so much you are going to be able to do with that small screen. With the fact that it has no camera, and yes some are putting cameras on the watch, but not fun to use that type of camera.

So I’m a bit more negative. I truly agree with some level of unbundling in the sense that we see the phone as a center and then you have your watch for some stuff, and then you have your AirPods for some other stuff, then we will talk later about Alexa, you will have Alexa for some other stuff. What was your core use case has grownup a bit actually because the capacities of the watch have truly improved. But there is only so much it’s going to expand, because there are true use case constraint with a watch. 

Nuno: Understood, but let’s play this by ear.

Like, and this is not my vision of the future, but it’s a potential vision of the future. We both wear glasses, right? Glasses, an interesting output thing because it’s what you see. It’s “big screen” is your glasses. So that’s cool. So that could be your display, like your mass display. At the end of the day, your processing power could be on your watch, right?

And the watch battery needs to support that processing power and a little bit of screen there. And you need to necessarily have some batteries on your eyeglasses, and you need to have, obviously projection. I don’t think this is fully science-fiction. It’s just one possible scenario of the future, but that would sort of justify that there is unbundling, that you have different mechanisms of input and output and processing no longer lies with these big devices.  

Bertrand: I think that’s a fair view of the future.

I would actually agree that at some point, it might happen, and even if it’s not glass, it might be to put some contact lens, it might be to replace your eyeballs at some point. 

Nuno: Maybe when I take my LASIK we can do something about the eyes, but yes. 

Bertrand: My reaction is more that, I’m pretty convinced that not that much is going to happen in the next 10 years. My take is that we will see more of the same, meaning better watch, meaning better Airpods, and use case slowly getting better. We look at in 10 years from now the phone is still there and pretty strong. In 20 years, it might be a different story. 

Nuno: Yes, well, we always do over estimate the speed that we get to a revolution. We always underestimate the impact. So I think we don’t really have clarity on what it actually is going to look like, but maybe we are being a bit too optimistic on when we get there. 

After 5 years, why is Alexa barely better? (37:47)

Bertrand: Actually that’s a great segment to Alexa. 

Nuno: Yes

Bertrand: Because if there is one piece of tech that has barely moved in five years and is showing us that stuff don’t always move that fast.

And actually here, it’s not just that fast. It’s pretty bad. And I’m sorry to be pretty strong on this.

Nuno: You feel very strongly about Alexa. Ok. 

Bertrand: What they’ve been doing. It’s quite fantastic. It’s like, okay, there is only so much it can really do in term of voice recognition.

So, let’s build many different devices. A small speaker, a big speaker, a medium speaker, a speaker in the oven. Let’s do all of this stuff and let’s improve a bit the recognition. So, okay, it’s going to recognize, not just me, but my wife, my kids. And it’s going to improve a bit the recognition.

But at the end of the day the recognition – one is still bad, and I’m not just talking about Alexa, all of them. 

Nuno: But some are better than others. I mean, just to be clear, Google home seems to be at least better in terms not only of recognition, but also of what it gives back to you.

Bertrand: But it’s so easy for me to make fun of it by showing you example of sentence you can try that are perfectly normal for any reasonable human being, that all these system completely, totally fully misunderstood. And when you think about the UX that is impossible to properly discover, it’s a clear reason why ultimately, skills 10 K’s of them, 100 K’s of them, they are all useless. No one is using them. And I think the this article is great: for me to breath of fresh air. At least some people are making the point that, guess what? “Actually I have not changed at all my use case in five years.”

And I think if we run a survey of users, it’s true of 90% of all users. And I feel sad to say that, don’t get me wrong, I would love to see the technology at a completely different level. But I think that’s a clear example that if you look at carefully what’s happening in AI these days, in deep learning – strong constraints. Yes, there are new models, like BERT that are doing much better, but it’s still very dumb models. Actually what it means is that, you have this issue with the UX where you cannot see it, you don’t know how to interact with it. It keeps making mistakes and the technology, itself the core deep learning technologies has improved, but it’s actually plateauing in many ways, like truly understanding language. 

Nuno: But maybe the analogy for this is: maybe the Amazon Echo and obviously Alexa, maybe these early plays that we’re seeing is a little bit the early plays that we saw for the emergence of smart phones. 

So. You know, if we have, for example, the Blackberry, I would say that’s the first device that allowed you to fundamentally be disconnected from your computer, do emails, do a couple of other things that were fundamentally linked to productivity. And at that moment in time, a lot of people saw that this is going to go very fast and it didn’t, right?

The first Blackberry actually is very, very old, way before the iPhone. And so we had to wait to get to a device that fundamentally shifted the UX, that fundamentally shifted what the interaction looked like. So in my world, maybe the analogy here, and I don’t know if you’re going to disagree or not, but the analogy here is maybe the Amazon Echo, the Alexa is the Blackberry. It’s showing us that there’s something interesting around voice, which I think is actually one of the most exciting spaces going forward, but it’s not it yet. It’s going to be something else. 

Bertrand: So that’s a fair point because I was going to say is that, if you compare to the iPhone, what you got in 2007 versus what you got five years after, in 2012, it was a huge gap.

The iPhone didn’t started with apps. It took them a year. It was not even 3G initially, so it was terrible to use as a cellular device. Very poor camera, no GPS first version. So technologcally it changed dramatically, that’s one point. Alexa did not changed much, it changed in term of shape, but that’s it.

Two in term of use case, the difference is insane between what you would do with your smartphone initially. And I remember people around me asking me, why do you care about a smartphone. To five years after, this becoming obvious, that you have changed how you use it. And I’m not even talking about 10 year after obviously and my point is that Alexa is nowhere this trajectory. And I think it’s important. I care deeply about entrepreneurs, about the ecosystem, and how resources are being spent. And it just frustrate me because I see people building companies and going nowhere because there’s no ecosystem. There is no industries. 

And yes, Amazon is doing a decent business selling this device. They are making money selling hardware. Google is doing at decent business making hardware, but for the rest of the ecosystem, there is zero dollar. And that’s a proof that the ecosystem is really not there. 

Is it the case that it’s Blackberry? Yes, I think it’s possible. I think there are two points. One is technologically we are reaching the limit of what you can do with deep learning, I’m worried that once we need to get some truly new technological step function solve this. 

Nuno: I’m not sure I agree on that. I think we are there. I think we just haven’t found the right way to manifest them in a system like this, right. I think the methodologies are probably already there. The thing is, what the methodologies we’re using today are methodologies that are decades back. 

Bertrand: I will strongly strongly on this one, and there is a question of, even if you have the best technology, is a pure voice-only based UX enough?

I don’t know. You could argue that given that you can have great assistants that you just talk to, and there is nothing more than just talking, I guess ultimately the UX might not be the restricting factor. 

Nuno: Yes, so we agree that this is pretty useless. We agree that it hasn’t changed much in five years and we disagree on a bunch of other stuff. 

Bertrand: Which is good. 

Nuno: Very good.

Bertrand: That’s part of the game.

Nuno:  Awesome, thank you.

Bertrand: Thank you Nuno. Bye bye.