The Top For Apple

Dominant market positions can do strange things to a CEO and his or her leadership team. In the case of Apple, the company's massive iPhone and iPad successes are leading it to miscalculate pricing of content on those devices. You can read the official Apple statement of its position here, or check out the Forrester analysis here arguing that ultimate fees from content providers to app platform players should be in the 5% range -- a long way from Apple's 30%. 

iPhone, iPad, and Android apps are not sideshow novelties -- in my estimation they signal a cataclysmic shift in the technology industry away from the Microsoft desktop standard and the cloud/Web paradigm. This is App Internet, representing a new model of applications that seamlessly combine the power of local devices with the scale of the cloud. App Internet is positioned to shift activity away from the Web to the app experience -- forever changing many, many markets. A recent Forrester survey shows that among tablet users, 39% spend more time using the web browser, 45% spend about the same amount of time using apps as using the web browser, and 16% spend more time using apps. These are the formative and critical moments in the development of the App Internet market -- the winners could become dominant for decades. 

And Apple is blowing it. It risks replaying the PC wars of the early 1980s when Microsoft welcomed everyone into their development world while Apple stayed "pure" and scared away its allies. We know what happened -- the world has had to use a lowest-common denominator PC operating system for decades, with excursions into wonderful places like Vista. This time around, Apple's hostile position could result in a 2014 App Internet market that looks something like this: 80% Android, 10% Apple, 10% Other. I can't wait to see Larry Page running around a stage in a sweat-stained turtleneck hoarsely shouting "Developers, developers, developers, developers..."

Apple has to play chess here, not checkers. It has to stay reasonable and accommodating and play for the ultimate prize -- dominance of the App Internet. If it doesn't, we'll look back at this moment and call it the top for Apple.

Comments

The Top For Apple

Spot on George. Apple pricing and margin for other people's content is greedy. They are providing a market place and expect the same margin as the operators of a 20th century retail store. They are seeking to dictate to publishers the terms on which content owners sell their products. Apple pricing will not only drive compatitors to undercut the Apple store, it will encourage some very powerful organisations to contemplate punishing Apple for trying to take advantage of its market position, even if it costs. As you say, that position may not be as secure as Apple like to think.

Not to mention precipitating federal investigation

Your suggested outcome becomes even more likely if federal investigation hampers Apple (and everyone else) from getting to a more economically efficient place.

The Top? Or Just Another Plateau?

I would love to see Larry Page running around like Steve Ballmer did a few years ago, imitating his favorite zoo animal or videogame character. (ahem) I'd argue we're at a funny point in history with more than a few information-based behemoths, all with a semi-monopoly in one area or another: Microsoft, Oracle, SAP, Twitter, Facebook, Apple, Comcast...the list goes on.

Consequently, Apple 2011 is in a much different place than Apple 1988. True, there are regulatory issues, but I don't see the DOJ being punitive with Apple if the primary beneficiary is the Googleplex. I have to believe the latest subscription plan is a strawman to see how much Apple can take off the top without raising serious regulatory ire. Apple may be forced to open up its kimono a bit more ostensibly to benefit publishers, but to the ultimate gain of Google and the nascent mobile payments industry, which may end up being the wireless carriers.

Comments from Apple CFO from a couple of years ago suggest that Apple has an ace up its sleeve: the iPad will be able to ride the same cost-curve that drove down the price of the iPod and then the iPhone to $100 and less. The difference is that all of these products have a dozen or so engineering innovations that enabled them to shatter various price points that had governed the economics of similar devices: for example, the cost of a keyboard had already dropped as low as it could go, but it was eliminated from the iPad design. What happens if Apple is selling a $100 iPad in 2014? If the past is any indication, that's what we might be looking at.

"The difference is that all

"The difference is that all of these products have a dozen or so engineering innovations that enabled them to shatter various price points that had governed the economics of similar devices:"

That is simply pathetic, they ride the wallet of middle of the road peasants with a taste for kitsch and that is it. Don't work a sweat over it, they are over the curve already and come the next stock crash they will be wiped out like any other that has no fundamentals apart from being the pet brand for people with little comprehension of what a credit card is. Sorry to break it to you, hope you don't manage any sort of finantial because that would be terrible news for any customers.

Good Advice?

What's a finantial? APPL underperforming the market? Anythings possible, I guess.

Try putting your money under the pillow. Safe, and about the same performance as in my company.

Apple isn't reasonable or accomodating

In fact, their strategy of seemingly planned obsolescence is completely opposite. I love Apple's products, but can't stand another OS upgrade killing my phone. The Android OS becomes more appealing with every brick wall Apple builds. If they have good apps, then it's icing on the cake.

GO not Chess

Another excellent piece George. Though I'd suggest Jobs is playing GO ruthlessly and is confident he 'owns' most of the board. I agree that the tactics that will lose Apple territory are not in the design or pricing of it's products, but rather how well it can embrace symbiotic relationships, regardless of it's success and brilliance in the former two. One question for you though: Both GO and Chess require two combatants, who is staring at Jobs across the board?

Who's staring at Apple across the board?

That's easy... It's Google. And the irony is that App Internet could end up destroying Google's business model. Once the migration begins out of the Web, the search and click world will start to collapse, along with Google's ad paradigm...

So Google could end up dominating a business that kills off its golden goose... A Pyhrric victory at best...

No NokiaSoft? Marketplace

No NokiaSoft? Marketplace never to be a contender in the APPmosphere? Ballmer underestimated it's importance for too long?

Pride Goeth Before the Fall

Apple has gotten way too greedy. While Microsoft was a relentless competitor against those who were directly in its space, it enabled lots of people to make money in various ecosystems. Apple, however, is indiscriminant when it comes to where it competes and as such is (a) building more enemies and (b) has invited government scrutiny...which Microsoft and IBM can tell you is no fun at all. It takes a lot to make Google look like the good guys these days. Apple has managed to do so.

I've blogged twice in the last two weeks on the subject. Little did I realize in the first piece how quickly it would come to fruition. I believe we are seeing Apple at its zenith.

http://doctordisruptive.wordpress.com/2011/02/02/apple-when-is-enough-en...
http://doctordisruptive.wordpress.com/2011/02/17/apple-that-didnt-take-l...

The App Internet is the Future

George, I am not fully convinced that this is the top for Apple.

Google's empire is under a lot of pressure from the App-Internet and I wonder if Android will allow it to retain the stronghold it had.

Apps are the future and a strong management makes them solid and secure. All that is still missing on Android. If it comes soon enough, well maybe Apple has a problem. But they can slowly drop charges as the market grows and retain their lead. I certainly believe that the browser and browser applications are dead.

More here: http://isismjpucher.wordpress.com/2011/02/19/mobile-relationship-managem...

Thanks, Max J. Pucher Chief Architect ISIS Papyrus

I think you are missing the

I think you are missing the point of this move.With both AAPL and GOOG likely to launch streaming music services soon,AAPL is just getting rid of the competition (on it's devices) when it comes to streaming video and audio.No more Netflix,Amazon,Pandora and the likes on iDevices,just itunes.

Learning Lessons Others Have Taught Us?

As noted already, your article's spot-on.

Apple should pay heed to what happens to those who get greedy. The proverbial pig normally ends up getting slaughtered. This latest throw-down is likely to be the one that wakes everyone up and say, Hey!

$.30 for a $.99 song doesn't strike people as much. Even the public's likely to take note of 30% for simply acting as a distributor to something of value being created by someone else. Society doesn't tolerate blatantly open greed very well. Just because you can (today) doesn't mean it's a good idea.

Somewhat tongue-in-cheek, if you do something that starts making people think Microsoft isn't all that bad, you need to rethink what you just did:).

Guess again, you start with a mistruth

The iTunes song charge is not .30 a song, that was just made up nonsense from the article. Apple was very clear about this when iTunes was first announced. Apple's profit is about SEVEN CENTS per track, after they pay the credit card micropayments (something they worked out as it was not even possible to do this prior to iTunes). I think hosting comes out of that.

Aggregator services work with small talent which has not made it big yet. They do take a cut, which varies per service. But you aren't dependent on getting some industry big wig to accept your music, or impressing some DJ, etc.. as was the case in the old days! Anyone can publish on iTunes.

And you hate that, right? Why? Do you just hate Apple? Funny, i have seen THAT one before.

There are tons of services that charge 30% or more, don't be ridiculous. Amazon changes more than this of it's 'partner' services. Try your local WalMart, known for low low prices. Wanna bet that most of that merch is not written up MORE than 30%? If so, you know nothing about retail, obviously. Typical retail mark-up is 100% when it's not on sale! With other things like Jewlry, etc… it's MUCH HIGHER.

People just want product, they are willing to pay. Apps are CHEAP!!! And they don't even sell on Android, you guys are too cheap to pay, obviously.

Society is going to get upset? In your dreams. We are not all Windows loving nerds, that's the key. Most of us that use Windows have either moved on or never really appreciate it in the first place.

Hi Bill, Not sure why so many

Hi Bill,

Not sure why so many seem to think I hate Apple. Because I question something? I use Windows, Google, Apple, and a range of other products or services. Love my iPhone. Love Windows 7, too.

While my opening comment may have been in error about specific amounts (it was actually intended as a generalization...should've said 'apps', sorry), it is interesting that, of the responses I've read, there have been a lot of comments like, "...Apple's profit is about SEVEN CENTS per track..." and, "...I think...", the gist of which got me in hot water with you. However, zero specific citations as to the -current- amount. iTunes has been around a long time now, what's current?

With regard to your retail comment, I've sold both wholesale and retail. In some industries, such as GE appliance parts, it was not uncommon to see their products marked up 250%. 7%, 30%, 250% or more, they're just numbers. The key is perception.

If Apple is perceived as having become too greedy, they're in the news too often for these 'types' of issues (e.g. gov't investigations, industry complaints, anti-competitive activities), an impact will be felt. One key factor, having worked at a company the FTC investigated multiple times because of competitor complaints, is that it risks defocusing the organization. Too much of that can indeed, itself, contribute to 'falling off the top.'

It's been an entertaining discussion.

Most of you are missing the point

You people don't even know the terms of the various Apple iTunes and App stores, this much is obvious.

Look, a lot of you are just haters, you have no idea how Apple has gotten to this point.

Nothing Apple has done compares to the intense greed that Microsoft has continually shown. Microsoft would spend more time making sure that it doesn't work outside of Windows---Apple never does this, they make a technology that works outside of their own systems whenever possible, it's not limited to Mac or iOS as a Windows like moat.

And the cut on a .99 song (most are 1.29 now) is only about .07 cents, so guess again.

Apple has a Web based method that costs publishers NOTHING. And it works on Android as well as iOS or any computer (even lame Windoze).

Apple handles all distribution, advertising, billing, etc…

And when you consider that the various and sundry Android app stores (none of which hold apps that actually work on more than a few of the hundreds of fragmented Android phones) AREN'T SELLING even 1/50th of the apps that Apple does, your argument look really sophomoric.

The user wants this to be easy. Apple can do that, and drive legions of customers to your content. But that is not good enough for you, and it's Apple that is the 'greedy' one? Look in the mirror.

Are the Fanboy Apple Fundamentalist forums all down?

"You people don't even know the terms of the various Apple iTunes and App stores, this much is obvious.

Look, a lot of you are just haters, you have no idea how Apple has gotten to this point."

Ok. We are having a discussion, Brian; an exchange of ideas. There is not one single view that defines 'us people'. There is more objective thought in this comments section than your entire bedroom!

Every second forum gives an opportunity for people to highlight their sad little blind allegiance to a tech brand and display their willingness to blurt propaganda for free, this is one of the other forums.

Don't have a hissy fit

By 'you people' I am talking about you Microsoft/Android fanboy losers, in case anyone didn't understand.

I might have an allegiance to Apple, but that is only due to two factors.

1. Apple is fantastic tech company that all others rip off . This is the HISTORY of the microcomputer.

2. Apple is a great investment! Yet, they get treated like Rodney Dangerfield--no respect, even now. Forward PE of 13 is too expensive? 'Near the tpo'??? In you dreams, Wintard.

I don't suffer Wintards any longer. You losers were wrong all along, but especially now, so get over yourselves, and quit pretending you want a real discussion.

You are scared. Your platforms are threatened and it obvious to everyone how lame the are when compared to the Apple alternatives.

iRoll

sigh.

Nice comeback

If the shoe fits, wear it. I used to be a windows fan myself, back when I didn't know any better. My boss brought me a Mac one day. I was like, what am I going to use that toy for? So, I know where you are coming from.

Free your A** and your mind will follow. Your Windows and Android garbage wouldn't even exist had Apple not laid it all out for them. And it shows, rather dramatically when you actually pick up the Mac or iPhone and use it for more than a few minutes.

You're Right! I Haven't :)

Brian: Respectfully, you manner of discourse is unnecessarily aggressive or combative.

You are right, I have not read an Apple music distribution contract personally. I've not found one readily posted online for review. However, there are uncounted references online from more reputable sources than I, that cite Apple's charging as high as 35% on a $.99 song.

Depending on how the musician or artist approaches the process, for instance if they are working with an agent, a Label, or other middle man and not doing everything themselves, there are arguments that the musician may actually only see 7% themselves. In these cases, they stand your own argument on it's tail.

Yes, Apple has invested significantly in its distribution business. Having been the product manager for a SaaS offering, I can also tell you, that for a given size investment, the incremental cost for carrying a new piece of content is relatively low.

I found your analysis of Apple vs. Microsoft to be backward. In the past, Microsoft has overreached as determined by society and been appropriately rebuffed. I think Apple is bordering on reaching a tipping point where they be similarly rebuffed.

As for who has more open vs closed systems, are you serious? Part of the very reason the Apple solution stack works so fluidly, is that they've kept it more closed than open, tightly controlling their entire vertical. In comparison, Microsoft based solutions have shown more problems over time because of looser control (which they're tightening some), but become more widely adopted as a result.

Unimpressed with your response Brian. Try again. We'll listen.

Do a Google search if you know how

Why do people like you write about things you don't understand? I hope you are trying to learn, but the info is out there so I think you are merely pushing your agenda instead.

For anyone who is interested (and 'googling it' is just too much work) here is a good summary.

Again, Apples profit is about .07$ per song (but perhaps higher on the 1.29$ tunes). It's nowhere near what you dreamed up.

And, if you become famous, you would keep all your music rights and Apple would deal directly with you. As an indie artist you will need to work with tunecore or some other aggregator/UPC service.

http://homerecording.about.com/od/duplicatingdistributing/a/Get_On_iTune...
http://www.apple.com/itunes/content-providers/music-faq.html

It's the music/book/movie publishers and distributors who are losing control here, Apple is making things MUCH easier for the little guy.

Ever write a textbook? I have. Did the publisher give you 70% of the profit? Uh, no, not even CLOSE.

Apple is fully in their rights, and this is a fair price, wether you like it or not.

Follow Up

Hello Brian,

I've seen the first link before: It's a generic article not specifically addressing the iTunes detail (% cut) being discussed in this thread. It talks mostly about the 'other' distributors and publishing intermediaries.

The second link also, is a generic FAQ that does not address costs at all. If you follow through on the application link, you'll find after a number of pages, you still do not get to specific pricing/rate info unless you're prepared to create an actual application and await Apple's reply.

While we tended to head down a music-only track, the original article more broadly discusses Music and Apps.

Being a bit more constructive, here's a citation from Wikipedia (http://en.wikipedia.org/wiki/ITunes_Store#Pricing_model): "When someone downloads an App, 70 percent of the purchase goes to the developer(s), and 30 percent goes to Apple."

After a few minutes more 'googling' I've yet to find any -specific- citations of the iTunes media business model; not a surprise, really. If you have something specific to cite, please provide it, I'd appreciate having the reference. Otherwise, quit beating your chest and citing generic and useless links. I've no axe to grind here, I'd appreciate actually knowing and what I've encountered opposes your own comments.

Thanks

But you were wrong, right? And I pointed that out (so sorry)

Hey, I'm not an expert, and not a musician (not a pro anyway!) but I know when someone is making it up as they go along.

I also know it's LOADS easier to publish your own music now. $9 per song to publish it on iTunes, and there is a fee per year.

It's a fair price, it's way more than you get with any music label, this much I know to be true, I have spoken to musicians about it.

Do your own googling, or just get back to making it up as you go along to fit your agenda as you were.

Who's your Daddy?

Numbers don't lie - with all the market share gains of Android/OMS/Tapas, as far as users WHO ARE ACTUALLY spending money, Apple is the only game. Period.

Where are publishers going to go?

The number 2 App Store - RIM/Blackberry does not have a shipping product
The number 3 App Store - Symbian - Just got cut off at the knees by the new CEO
The number 4 App Store - ANDROID - with all the buzz/press/ and market share gains, is largely impotent at getting its users to PAY for content.

Empty discussions like "this may be the top" for Apple don't bare any relationship to the facts. Where is the money going to come from for publishers? Right now and for the foreseeable future is from Apple. They know it and so does Apple.

Apple has built the payment infrastructure (iTunes), the platform (iOS) and created a tremendously successful NEW market (iPad).

If you want to ignore 160 Million paying iOS customers then bounce to the Web and see how well things turn out for you, but if you want in (and they all do) then there's no free lunch. 30% Please or take your chances elsewhere. The choice is yours

http://www.intomobile.com/2011/02/23/android-market-growth-hits-861-ipho...

Great information on Apple! A

Great information on Apple! A really interesting read!