240: ‘Drastically Shakier’ With Ben Thompson

Episode Summary

Executive Summary: The conversation moves from sports and coaching analytics to a deep dive on Apple’s slowing growth, China exposure, services strategy, and App Store antitrust risk. The speakers argue Apple’s core device business is maturing, China is its biggest vulnerability, services are increasingly central, and the App Store’s rules are increasingly rent-seeking and anti-competitive.

Main Topics: Sports analytics and coaching as a data-driven lens (Priority: 3/5): The discussion opens with NFL and NBA coaching changes, using the Packers and Bucks to illustrate how coaching, strategy, and analytics can materially change outcomes. This becomes a broader metaphor for how data-driven decision-making has overtaken old-school intuition in sports. Apple’s earnings warning and China slowdown (Priority: 5/5): A major portion of the episode examines Apple’s revenue warning, the market reaction, and the argument that China—along with trade-war nationalism and smartphone saturation—is the central source of weakness. Apple’s China moat is shallower than elsewhere (Priority: 5/5): The speakers argue Apple is differentiated in the U.S. by iMessage and ecosystem lock-in, but in China WeChat and local Android variants reduce Apple’s user-experience advantage, making iPhones closer to a commodity than pundits assume. Services as both narrative and strategic shift (Priority: 5/5): The episode revisits Apple’s services framing, acknowledging that services revenue is real but also warning that Apple may increasingly make strategic decisions like a services company, which introduces new incentives and tradeoffs. App Store antitrust and rent-seeking (Priority: 5/5): The discussion examines the Supreme Court/App Store case and why Apple’s 30% cut, in-app purchase rules, and control over subscriptions may be legally defensible in a narrow sense but still anti-competitive in practice. The iPhone as the perfect product, but a growth peak (Priority: 4/5): The speakers argue the iPhone’s combination of physical scarcity and software differentiation made it uniquely profitable, but that this same perfection means it is unlikely to be matched or replaced soon. Apple’s expansion into TVs, music, and platform compatibility (Priority: 4/5): Apple’s deals with TV makers and Alexa support for Apple Music are interpreted as evidence that Apple is prioritizing services growth and ecosystem reach over device exclusivity.

Key Arguments: Apple’s earnings miss was not just a bad forecast; it signaled a deeper inability to accurately assess demand, especially in China. China is the single biggest risk to Apple because the company is exposed on both production and consumption sides. Apple’s China problem is structural: WeChat and local services weaken iOS lock-in and make the iPhone less differentiated there. Apple management appears too optimistic about China, either because of poor communication or a genuine misunderstanding of the market. The iPhone 10/X cycle fit the thesis that major form-factor changes help Apple in China, while S-model years tend to underperform. The iPhone’s historical growth was driven by geographic and carrier expansion, which is no longer available at the same scale. Apple’s services revenue is financially meaningful, but the company may now be optimizing more like a services business than a hardware business. The App Store’s 30% cut is not justified by consumer harm in the way classic antitrust cases are, because app prices are already low; the larger issue is exclusion and rent extraction. Apple’s in-app payment model creates hidden friction for developers, especially smaller ones, because it forces dual payment systems and increases the cost of entry. Apple’s push into TV integrations and music availability on Alexa suggests a willingness to sacrifice exclusivity to gain services growth.

Data Points: Time since last podcast call: 8 months - The hosts note the long gap between recordings using Skype’s call history. Apple market capitalization peak: About $1.2 trillion - Referenced as the level Apple had reached before the earnings-related selloff. Packers coaching change timing: Midseason - Used as an example of an unusually early firing for a well-run organization. Samsung China market share: 18% to 0.9% - Cited to show how badly Samsung was displaced by Chinese brands in China. Apple 6S cycle China issue: $2 billion inventory write-down - Mentioned as evidence Apple had underestimated China demand in an earlier cycle. App Store standard commission: 30% - Central to the antitrust discussion about Apple’s cut from app and subscription sales. Long-term subscription commission: 15% - Referenced as Apple’s reduced rate for year-plus subscriptions. Battery replacement fee drop: $79 to $29 - Discussed as a factor in people delaying iPhone upgrades by replacing batteries instead of buying new phones. Apple installed base in China: Still grew - Used to argue that unit sales weakness did not mean Apple was losing all users in China. Apple TV 4K price: $180 - Compared with cheaper streaming devices as part of the Apple TV value discussion. Apple TV non-4K price: $150 - Used to show the high price of Apple TV relative to competitors. iCloud free tier: 5 gigabytes - Discussed as a limitation that can hurt backups and push users toward paid storage. Used CD resale value in college: About $8 on a $16 CD - Illustrated how digital media destroyed secondary markets for music.

Pivotal Quotes: "The idea that Apple is on some countdown clock to a, quote, next big thing is completely the opposite of what to worry about." — Ben Thompson: On why analysts are wrong to obsess over Apple’s next breakthrough instead of execution. "I would much rather have a liar than someone that's not fully in touch with reality." — Ben Thompson: On why Apple’s overly optimistic China messaging is more troubling if it reflects genuine misreadings than deliberate spin. "There is sort of an obsession, especially with Apple, with what's the next big thing." — Ben Thompson: On the unrealistic expectation that Apple must keep producing iPhone-scale hits.

Implications: Apple’s growth story is shifting from device-led expansion to monetizing an installed base, but that makes it more exposed to China, regulation, and accusations of platform rent-seeking. Expect more scrutiny of Apple’s market power and more tension between user experience and revenue expansion.