The App Store: First Comes Power

There is a frenzy of conversation on the Internet about pricing at the iPhone App Store (examples here, there and everywhere). While I'm interested in all of the different perspectives that are shared from users, developers and observers, I don't think that enough attention is paid to Apple's objective. They certainly don't want poor applications, or for developers of iPhone applications to have unsustainable business models. But, while they want to make short-term profit from iPhone applications, they're more interested in maximizing long-term profit for the entire iPhone franchise. The KEY to maximizing iPhone profit is to create very high switching costs for users, just as they did for the iPod via the iTunes Music Store. Apple is using the App Store to create switching costs, and they know that if all of their users have "invested" in many little applications that will only work on the iPhone (a la songs from the iTunes Music Store), they will eventually have users locked in to a long-term investment in the iPhone franchise. The profit from the successful execution of the iPhone franchise strategy will dwarf any amount of profit that they could suboptimize if they focused on what was best for the iPhone application development community.

There is no killer APP for the iPhone, but there is a killer APP STORE. Until they believe that their users have hit the point-of-no-return, they will continue to optimize the app store around volume, not quality or price. Volume = switching costs = long-term domination.

Can't Apple have its cake and eat it too?

Sure. There's no reason why Apple couldn't modify the app store to balance volume with quality and price. And they will. But, they know how close they are to becoming THE dominant mobile phone company in the world and they're not going to take any chances. Once they've locked users in, they'll shift focus to mine as much profit as possible from each of those users each year. That will mean having them purchase more expensive applications (in addition to the little knick knacks that dominate the store now), and driving increasingly tough bargains with the cell phone networks.

What's the lesson for developers?

Don't waste your time hoping that Apple will change its strategy to make it easier for you to sell your expensive applications and more difficult for other developers to sell their inexpensive applications. And, don't count on ever getting any more free advertising from Apple than you get now. One way or another, you'll have to pay for your exposure (marketing $s or pricing $s).

Do take note of their strategy and focus on switching costs.  If you take the long view and build a defensible competitive advantage by creating value for users and significant barriers to entry, you will do well.

To sum up Apple's strategy (and Tony Montana's):

Step #1: Get Power

Step #2: Use Power

It's a good strategy.

Comments

[Dan]

In my opinion, it's not about switching costs switching costs, but rather bragging about the number of apps. The Mac had years of perceived irrelevance due to low "numbers", both of users and available apps. So, Apple is demonstrating dominance in the smart phone market by touting numbers, and I think that's why free apps cannot opt into the in-app purchase. The recent 65,000 apps number includes many "lite", or demo versions, and if free demo apps could have in-app purchases, there would be fewer double-apps (lite and paid), and the rate of growth in the "numbers of apps" might be less.

But should Apple deny low quality apps? If that's 50%, should they block that many apps, just on subjective opinions on quality and value? It's surprising, yet encouraging, that they leave quality judgements to the marketplace, rather than being strict and tight about what gets in.

The app store is currently "broken", when some tasteless apps make it through and then get pulled when discovered, while Tweetie, Eucalyptus, and many other get denied. But the current pricing situation seems to make an interesting dynamic, and I love that iPhone apps are not priced like other mobile platforms, nor like overpriced console video games. Why do people keep telling me Apple stuff is overpriced, when their app store is enjoyably affordable to everyone.

But seriously Apple, if you like simplicity and elegance, just raise the price of every paid app a penny to the nearest dollar (euro, whatever). $1, $2, $5....simple ;)

[Rick Damiani]

What Rob said is spot-on. The cost of switching is a psychological one. I was initially resistant to moving to the iPhone platform because of the time and effort I invested in customizing my Windows Mobile device. It was only after taking a long and hard look at what I was actually using (vs. what I had installed and was maintaining) that I realized that a switch would be much simpler than I thought.

[NormM]

I disagree with your premise that iTunes creates a high switching cost for iPods. Almost all content on iPods is ripped from the internet or shared from other users. The tiny bit that is downloaded from iTunes can easily be burned (using iTunes) to CD to export it to any other player. Apple doesn't depend on lock-in to keep people from switching -- it depends on good design, convenience and familiarity. Many people buy their iPod music from non-Apple sources (DRM free).

The iPhone situation is similar. Having a single popular and well-designed platform to write for is attractive to developers, who are free to also port their apps to other platforms if that makes sense. If there are no other similarly attractive platforms that really isn't lock-in.

[Ewan]

Some people are saying that Apple has it wrong, and that mid priced apps are more likely to have quality and hence loyalty than a bunch of cheap throwaways (ie John Gruber today: http://daringfireball.net/)

Above Sean posit's that the current strategy is temporary and as soon as Apple feel comfortable in their dominant position they will shift focus to revenue over volume.

I would suggest that both arguments ignore the existing evidence: Apple dominates online (and even all) music retailing and could easily exploit their dominant position to make more profits from music sales. They could push people towards albums and away from singles, raise prices across the board or just for popular music. They have consistently failed to do so - preferring to maximise volume over margins, with the argument that their margins are made on hardware (hard to compete with) rather than downloads (easy to compete with).

I think they plan to follow the same path with Software - focus on volume vs revenue, using a simple store model that rewards low pricing and high volume. They want software to be accessible to the greatest number of users and to do that they need excellent, cheap product. John misses the point when he says that we will be more loyal to quality, must have software than a bunch of pointless apps. Yes of course, but Apple cares more about the additional 20% of users they can make into App customers with good (but not great) $1 apps.

For Apple it is not apps/user but penetration that counts. What proportion of iPhone owners have downloaded at least 1 app? What proportion have bought at least 1 app? Each of those customers is closer to to being a repeat customer (of music as well as software, once they are comfortable with the process) and that is the lock in that Apple craves.

I predict that will not change course significantly, either now or in the future.

[Ray]

Isn't this pretty much the same thing Microsoft has done over the years with Windows? People who bought Windows apps, especially custom written apps, had to stay with Windows to use them...

[Nick Dalton]

I completely agree that Apple’s strategy should be to lock in users to the iPhone platform for the long term. This will benefit both Apple and developers.

However, I disagree that the tactic Apple should employ to achieve this goal is to encourage the volume of inexpensive apps. These apps do little to create switching costs for users:

• Most of the “novelty apps” are used infrequently.


• They don’t manage or maintain any data that you care about.


• Low priced apps lower the switching cost.

In building the iPod ecosystem it was vital for Apple to make available as many artists and songs as possible because if your favorite artists were not available on the iPod/iTunes platform, you would be less likely to switch to it from CDs.

In the mobile phone marketplace there is no equivalent to CDs. Apple already has the largest store of mobile applications and all competitors have to play catch-up both in therms of volume and ease of use. The goal of critical mass for the App Store has already been achieved. Now Apple needs to work on increasing the switching costs.

The way to do that, in my opinion, is to open up the iPhone APIs further so that the most innovative apps can only be created on the iPhone platform. And create an API for MobileMe so that users get further locked in to their data.

With everyone and their brother launching “app stores”, Apple needs to continue to innovate to stay two steps ahead. Some ideas: allow the purchase of content separately from apps, allow the sale of subscriptions or other recurring revenue opportunities for developers.

[Doug Adams]

I agree with this article and its advice. The comparison to the iTunes Store (remember when it was the iTunes Music Store?) and the iPod are spot on. And, agree with it or not, it couldn't hurt for developers to take this view into consideration.

[Rob]

The cost of switching here is not the financial cost, but the psychological cost. Once someone has an ecosystem of apps established on their phone, and are comfortable with it they will be resistant to the idea of setting up a similar one on another platform unless there is a very clear reason to do so. This raises a substantial barrier to entry. It is not a quesiton of whether or not people can switch, it is a question of how comfortable they feel doing it.

[Someguy]

All the cheap little apps are not that useful, this won't result in user lock-in. They are pretty much interchangeable and people can create the same kind of apps on any other platform. Android will come of age and provide the exact same stuff, for instance. To create high switching 'costs' for users, Apple will need quality third party apps making the most of the hardware. Apps that don't exist or that are not easily replicable on a non-Apple cellphone.

When people consider buying their first Mac or switching to GNU/Linux, I don't think they care about the flurry of little apps written for Windows. Because they will likely find something similar on the new platform. But they need to find suitable replacements for a few key Windows applications.

[Martin Pilkington]

The question is whether we want the iPhone to become the Windows or the Mac or the mobile world. Microsoft went for quantity. It allowed them to become dominant and take over but they had to lower their standards and get their hands dirty to do it. Apple went for quality. Sure you don't have as many users, but the users you do have are happier and more loyal and so you can get more profit for them.

The problem with cheap apps (granted I'd consider even £10 for an app cheap but for these purposes I'll mean the lowest priced apps) is that they're easy to build as there isn't a lot of money in them. No-one wants to spend a lot of resources on something they can't make a decent profit on, as such you get lots of them on the App Store. But there's no reason they can't also be easily made on any other platform.

It isn't the quantity of apps that defines the killer platform, it's the quality. It's the quality that gets people loving a platform, that makes them feel the apps they use are essential. It's the quality that keeps them loyal to the platform, so they lock themselves in, nobody else needs to.

Now assuming there was another platform that had a similar selection of apps to what I use for the same price and I switched, it would cost me just £31.51 to replace my apps. That's the price of a console game. The cheapness of the apps means other platforms will compete on price as well, this means that it becomes cheaper to switch. The thing keeping me with my iPod touch isn't the quantity of apps, nor their price, but the quality of the OS and the few good apps out there.

Apple is one of the few companies who sees that you don't have to compete on price and that you can compete on quality as well. Unfortunately the app store isn't set up to let this same belief filter down to iPhone devs as it has on the Mac.

[Radek]

By the way, to which phone would you like to switch. There is no phone which can even come close to iPhone and apps on it.
Maybe in year or so somebody will make something close to it, but by that time there will be 25.000 or more apps for iPhone. Some of them junk, but many of them are really creative.