Apple’s Intrusive Smiley Faced Cash Grab: The iPhone App Store
A G3 iPhone, third party apps, GPS, and all this for $199? Surely, the god that walks among us named Steve Jobs must be crazy! Users get the stuff they've been clamoring for, Apple will sell a billion iPhones, AT&T gobbles up new subscribers like Pac Mac gobbles dots and the developers get a shiny new store to show off their applications.
It seems like a kind of magic to longtime followers of Apple. The company has rarely, if ever, traded profits for market share. You can argue that the Mac mini was a clear swipe at the low end market and that the margins are lower than any other Mac but if you take a look at the push for the Mac mini you'll notice that the mini exists in some odd limbo. To Apple the mini is like a case of herpes, sure they have it but they don't talk about it. Apple's most visible product, the iPhone, has suddenly become all about price. The excellent analysis by James Stoup reveals just how hard Apple is pushing to own the market.
This is a clear departure for a company that bases a goodly amount of its appeal on being a luxury product. You pay more for a Mac because it is better. How do you know it is better? You paid more for it. The whole thing seems out of character for Apple, just how the hell will the company make the usual margins selling a phone for $199? Where are the stacks of cash for Apple?
The easy answer is that, as alluded to earlier, Apple is going for long term market share and is willing to take the short term hit. That answer doesn't give Apple enough credit by half. Apple wants long term market share and short term rewards, if only there was some way the company could realize both. It turns out that there is and it is called the iPhone App store. The store is the greatest example of a corporate cash grab that is "good for the user" and "good for the developer" since Apple pitched the iTunes store.
The app store seems good for the consumer. Steve Jobs tells us that that they've had over 25,000 applicants for the program and signed on 4,000 developers. Thanks Apple, you're saving consumers from wasting money and downloads on pure crap. The idea that Apple is going to vet each program is alluring, for the end user it means no more duds. Not only will you be spared the torture of purely awful programs your phone will be more secure because of Apple's safeguards. Choices and safety? How can you go wrong!
The news is even better for developers. If you write a decent application for the iPhone you'll get a spot in the app store. With a spot in the store you also get a tacit endorsement by Apple and delivery straight to your target audience. Additionally, the app won't have to compete with the mass of developers who suck, your app will be competing against other great developers. Your program will sell based on how useful it is rather than how high the google ranking is. A lot of developers for the iPhone are going to make a ton of money.
With the way Apple is pitching, and the people the company is pitching it to, it seems like no big deal. Small time guys will be happy to suck at the teat and give up 3 tenths of the sale price to Apple as they should be. But larger developers, developers who already spend cash to advertise applications for smartphones, aren't going to be as happy about the situation. Imagine you publish the PDR app for blackberry phones. You've got a loyal following and the only thing holding a lot of doctors back from jumping on the iPhone bandwagon is that your app isn't on the iPhone (Steve spent a lot time talking about medical apps, conspiracy types will say that is because he's been spending time at the doctor but it is because he knows the market). You sell a copy for the Blackberry you get $50, selling the same app for the iPhone nets you $35. That's almost a gallon of gas!
Even though Apple has been pitching the iPhone as a new way to do things the programs that people are likely to buy are the apps ported by big developers, the apps that they had on their blackberry or palm that they want on their iPhone. With this in mind it is easy to view the app store as less than a convenience for customers and more as a tax on developers for being on the iPhone. The computing equivalent to the app store would be a version of windows that you can't install third party programs unless you buy them through the "Runs for Sure"* store offered by Microsoft. If Microsoft tried to pull off that stunt people would be outraged. When Steve pulls it off people are excited.
There are two ways to look at the app store. One is that it is a loving and caring method designed by Apple to make life better and easier for iPhone developers and users. That is the world through Apple colored glasses. The jaded will argue, with merit, that the app store is nothing more than a well camouflaged cash grab by Apple, a cash grab that manages to rob consumers of choice and freeze out access to customers for developers. Call the app store a purely beneficent move by Apple but realize that the reason the app store is showing up isn't because Apple loves you, it is because Apple loves cash.
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Comments
It’s nice to see that Apple will not make the same mistake that they made with MacIntosh in 1984 when they let Sculley prevail with his insanely high pricing and retarded the Mac’s market share growth for the next 20 years.
You’re right macglee it is confusing, I’ve fixed it
This article assumes (correctly or not, I don’t know) that no money is paid to other cell phone manufacturers to sell apps on their phone. I’m hesitant to think that the app store is especially bad if it is just like any other cell phone manufacturer’s app store, or even if it is better.
There is one big flaw in your story, Apple still get the same amount of money for each iPhone sold, just not from the same people.
The buyer of the iPhone pays $199 and AT&T;pay Apple $200 for every iPhone, it is called a subsidy and it the standard model for mobile phone sales.
Apple will still get the same money for each phone sold, no loss to them.
This is no different than many other platforms out there. How does a developer get their game to run on the PS2, PS3, Xbox, Wii? Do you think they can just press the DVDs and send out the boxes?
No, they need to pay the manufacturer of the box for the license key, otherwise the DVD is nothing but a shiny bit of plastic when inserted into the game boxes.
Apple can do this because it’s a new platform. Any developer wants in on the potential income of the platform, they have to share.
Don’t forget that Apple pays for the cost of the Store and the distribution.
If you’re a developer and your application’s size is roughly 50 MB, do you know how much it would cost you in bandwidth alone to deliver it to 100,000 clients? In the case of an iPhone/iPod Touch case, Apple foots the bill. If you have a free application to deliver, Apple foots the whole bill with nothing coming in.
Second, if you’re a developer that wants to sell directly to the customer, that means you have to have your own system to handle credit cards. Do you have any idea how much the credit card companies take? I have such a business and I pay the credit card companies $0.30 + 3% of every transaction. If I were to sell a progam for $3 that means the credit card companies’ cut is $0.39. That’s 13% of my income going to the credit card companies (and that’s not counting charge backs and other fees like $395 per month system access fee). Apple saves you that expense.
So it’s not all greed.
Everything has pros and cons. With the App Store, the pros are numerous. Better security, better and simpler delivery, more exposure etc…
There are two cons that I can think of:
1) Income sharing. Though not as bad as you think it is because it save the developer the expense of distribution and credit card handling and stuff like that.
2) Loss of control. If Apple doesn’t allow your application for whatever reason, then you don’t get to sell it. To me, that is the biggest disadvantage.
Apple and AT&T;are making more ( potential ) money on this new pricing structure. Apple drops $200 off the iPhone but AT&T;adds $10/month more to the service plan ( which is now 3G ). Over a 2 year service agreement AT&T;will be pulling in $240 more on those contracts. Assuming Apple fills the apps store with things people wants to buy ...
I could see Apple’s sense in making iPhones more expensive. Make people realise they have value, in contrast to phones which are “free” (+2 year contract!) and people break or lose them and think they can just get a replacement free. I’d hoped Apple was originally going to increase the upfront cost but link it to an amazingly cheap phone plan - thus keep the perceived value and make people aware of how cheap the calls are… but it didn’t turn out that way unfortunately.
Now, the cheaper phones is a sign of Apple entering a more regular relationship with phone providers. And the side effect will be reduced value of iPods… I mean, since I’m on a contract already, I might by a v1 iPhone for $100 (instead of a $200 iPod Touch).
ps. I’m surprised the AT&T;cost per month is only $10/mth more! I think the increase number of apps, MobileMe, and high speed downloads will more than double data usage on the network. So AT&T;isn’t making more money.
Wow, good points all around!
@jdjd:
IT depends on the carrier and the cell phone I think. For palm and rim you can usually install those programs by downloading the software off the internet. When I had verizon if you wanted to buy a program for your razor you had to buy it through verizon. verizon sucks. But this is the first time to my knowledge you have to pay the manufacturer of the phone for programs.
@parky:
I’m not sure Apple ends up with the same amount of money with the new plan. you end up paying the same amount of money but that doesn’t mean it all goes to the same place. Maybe at&t;is going to kick back more money to apple but I doubt it.
@jbravo:
I see your point. If you compare the it to the wii it seems a little simpler. Except you pay cash to target and no one knows what you have on your wii. I suppose it depends on your point of reference. If you liken the iPhone to a psp it is business as usual, if you liken it to a smart phone the situation is odd, if you liken it to a computer it seems kind of crazy.
As for the distrubution costs and so forth, I think that is a bit of a red herring. I can create and distribute an application on the internet for basically nothing. Unless lots and lots of people are downloading the app it isn’t going to cost me a great deal of money. iPhone apps will likely be smallish so it isn’t really a problem. The credit card cost (or a proxy like kagi) can be significant but most people are going to be buying apps from established companies, not the little guy. Rogue Amoeba (just to pull a name out the air) already has the infrastructure in place to handle credit cards and downloads. You’re right, for the small time guys, it is worth it but for the people who sell a lot of programs the app store is redundant, it is a tax on those guys to be part of the revolution.
The biggest disadvantages are loss of consumer choice (appole picks the apps for you), the loss of choice of where to get you apps (one outlet only) and the level of control Apple will assert over your choices.
Honestly I suspect it will be abetter experience for consumers over all but I’m a little miffed that Apple knows better than me what I want.
@greg
I really liked the idea of buying a phone without a contract. It made the process much less painless and you could get a new phone without reupping.
As far as the pricing goes, I suspect that At&T;knows what they are doing on this one. They’ve spent a lot of money to roll the network out so most of their costs are probably fixed. I’d wager that that $10 a month is almost pure profit. But I don’t have any problem with that, I’m willing to pay for more speed. I’d bet if people could up the speed of an iPhone for 10 they’d all do it.
The contract extension is a different matter. This time it won’t matter, at&t;+apple has a 5 year deal going with one year gone so I’ll sign the new deal without a fuss but when it is time to sign up and the end of the deal at&t;apple is less than two years away I’ll have to really think about it. Oh, if some android phone is better, I’m going to be seriously pissed.
AT&T;WILL be buying the phone from Apple at more than the price they sell the to customers, that is how a subsidy works. AT&T;could be paying Apple $399 for an 8GB phone, maybe more, maybe less, but it will be enough to make Apple a significant profit on the handsets. My guess is that with the numbers being produced the change in design (plastic not metal), that Apple will make the same if not more margin on each phone sold.