How Apple made the Mafia blush.
In the last few days Apple made a huge announcement detailing how companies can sell books, music and any other service via the iPhone and iPad. And in the process made the Cosa Nostra blush.
To get the full impact of what Apple has pulled here I’ll give you an example. At the moment Amazon sells eBooks through its Kindle store. You can read these books on Amazon’s own Kindle device, your Mac or Windows PC, your iPhone, iPad, or a phone running Android. More importantly to Amazon than your ability to read a book, you can also buy books through these afore mentioned devices.
The purchasing of Kindle books through iPhones and iPad’s wasn’t a straightforward operation because of Apple’s rules. You can search for a book you might want to buy but when you actually go to purchase it, the web browser fires up and you complete the transaction on Amazon’s web site.
Apple gets Greedy
Now Apple is getting greedy. It doesn’t want Amazons customers to buy books without getting it’s own cut so it simply changed the rules. Now if your application allows users to access a service - streaming music, books, magazines etc - they must have the option of being able to buy that service through the application at the same price as on the web site or elsewhere. But Apple takes a 30% cut if a person buys through the app.
So image you run an online dating site for people who keep ferrets. You don’t make a profit from this site, you just want more love in the ferret-fancying world, but you do charge users because you have to pay for hosting the site and the developers who maintain it. Users of your nifty iPhone app have to login with their web site credentials and if their membership has expired they are taken to the web site as asked to pay up. But very soon Apple will remove the application from the App Store unless the ferret fancier can sign up through Apple.
The 30% that Apple wants is so high that it will make many Apps economically unviable. I doubt that Amazon, that already sells eBooks at rock bottom prices, can absorb the 30%. And it can’t just hike up the prices for iPhone/iPad users either as Apple states you have to charge the same amount.
And it is not just Amazon that will be seeing this problem. Apple doesn’t currently have a streaming music service but other services exist such as Spotify and Pandora. Their margins are also painfully thin, nowhere near the 30% Apple tax on transactions.
What do I get for my money?
But what do companies get for there 30% that don’t get from elsewhere? Well Apple has made a very simple system for them that does all the credit card processing and billing. But this is hardly unique. There are many thousands of software houses that could write such as thing and integrate it with PayPal, Google Checkout or a myriad of other payment companies. If you look at how much other companies charge for processing payments you can see what a complete and utter rip off the Apple tax is.
Google and PayPal charge between 3.4% and 1.4% depending on the volume of money passing through the account, the more volume the less they charge. Apple might argue that they make the system simple and easy to use; PayPal and Google argue the same thing. And as stated earlier there are many software houses that can build something just as simple as Apple has. There are even hordes of smelly geeks who’ll write the code and give it away for free under an Open Source License and offer support as well.
Also after purchasing the book or song, the person who wrote the app has to transfer the book or song to the iPad/iPhone. The 30% doesn’t include serving the content. The cost of that is still borne by the people who wrote the app.
The App Store Is Different
Apple also takes 30% when a user buys an App. This 30% though is quite justified. Before the iPhone, yes there was a time when it didn’t exist, there were other smart phones and there were other App Stores for these phones. But getting software on your phone was hard – hard for everyone. The other App Stores usually took a cut of between 50% and 70% and then getting the software to run on the phone was as best a tedious nightmare. I remember trying to get the Opera Web Browser running on my Palm Treo 650. I had to get a version of the JavaRuntime on it. It took ages to find complete instructions and was really hard to install.
Apple not only simplified the system but charges, what nearly every developer considers, a reasonable price. The 30% for Apps covers the hosting and distribution of the software and any updates, the billing system and a whole load of other features that would cost developers much more if they were to attempt to role their own solution. The App Store also solves the biggest problem any independent developer has – discovery. Even if you could roll your own App Store and could get your costs to below 30%, how would people find you?
Apple’s Justification
“Our philosophy is simple – when Apple brings a new subscriber to the app, Apple earns a 30 per cent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 per cent and Apple earns nothing,” Steve Jobs, Apple’s CEO.
This is far from the truth, if not an outright lie. For example if I buy up some Google Adwords, do some search engine optimisation and get people coming to my web site and then direct them to Apple’s App Store I, the publisher, have brought a new customer to my app. So therefore I should expect to get 100% of the money they spend on/through my app regardless of how they purchase the content, right? Wrong. If they use Apple’s system, I get 70% of the money paid out.
While having an app in the App Store gives a route to discovery, nothing is guaranteed. You don’t just stick an app in the App Store and become rich. You have your own web site and marketing costs.
A more plausible justification.
Apple could have justified their decision on the following grounds:
We spend a lot of money creating and advertising the iPad/iPhone. We have created a unique ecosystem that consumers love. If you want to be part of that you have to pay.
And they have a point. Developers can create an App, give it away for free and then collect money from people without giving Apple a penny – freeloading I believe the Americans call it.
The problem is, nothing is free. To get an App in the App Store you have to:
1. Write it. This takes time. Time is money.
2. Craft something that people will actually want to use. This takes creativity and design- both take time. Time is still money.
3. Generate a buzz. Getting reviewers to write about it, promoting it. Again this takes time.
4. Pay Apple a fee, currently US$99 a year.
So after investing a lot of time and getting around Apple’s pathetic vetting system that kicks out harmless App’s but allows pirates free access – you now have an App that people can use.
If you have developed something special and are making money from it without recourse to giving Apple a penny, then Apple is screwed right? After all they host your App and promote it as Staff Picks or in the Top 100? Wrong.
If a person or a company writes a compelling App for the iPhone/iPad then this can only help the iPhone/iPad and have a part in selling more. An expensive platform that has many thousands of quality applications will make more profit than a cheap platform that has none. Profit is the keyword here; business is about making profits, not shifting units – something Apple understands but Dell doesn’t. Although Dell shifts more boxes than Apple, Apple makes more profit.
The format is consumption only.
The format of both the iPhone and the iPad is geared to consumption of data not really it’s creation. Yes you can take photos and make videos on an iPhone and you reply to emails, but would you write a novel using a touch screen keyboard? Someone, somewhere will but the answer is no. Apple needs content creators, without them you have either a very pretty object that is a not-very-good phone or a huge touch surface that does nothing.
Apple has provided iTunes so the customer can get their fix of music and films. It has also provided an App Store to create the lubrication between web services and finger swipes. But why is it now muscling out certain content providers and potentially hurting its self?
The Path to a Monopoly.
Apple has it’s own piss poor bookstore, iBooks. So if the Kindle App and Amazon disappear from the iPhone/iPad then it can take up the slack. The only way I see Amazon keeping the Kindle App on the iPad/iPhone is to remove the ability to buy books. As stated earlier if you have an App and utilise in App purchasing the prices have to be the same as other methods. If Apple price matches iBook books with Kindle books then straight away Amazon is 30% down. In fact Apple could discount it books by close to the 30% tax rate and screw Amazon completely.
Also other music providers such as Spotify and Pandora cannot be happy about giving Apple 30% and this rule change makes their business model untenable on iDevices. The idea that nobody at Apple knows this is beyond belief.
Apple is creating a monopoly here in areas it wants to controll. On the way there it is going to squeeze others for it’s 30%.
The Consumer
Monopolies are bad for customers and bad for competition. Apple has been resoundly beaten in the eBook space by Amazon. Amazon’s Kindle is far superior for reading books than any iDevice; easier on the eye and you can read the page in bright sunlight. Amazon has many more books than Apple and I can choose where I read my Kindle books: iPhone, iPod Touch, iPad, Kindle, Android phone or tablet, Mac or PC.
If the Kindle reader is not available on iDevices, how will consumers know they have a choice? By and large they won’t. In the same way they don’t know they can buy songs and albums from Amazon and many other online shops cheaper than iTunes. 70% of legal music downloads in the USA come from Apple, people have a choice but don’t use it because they don’t know about it. And while the content is all but banned by the 30% tax, consumer will never know about it.
Cutting your nose off to spite your face.
The future direction of computing is quite clear: it is about consumption on mobile/portable devices. Some of that consumption will be business related and the rest pleasure.
In the business world we have “Software as a Service” or SaaS. Instead of buying shrink-wrapped software and installing it on a computer you go to a web site and do your work there. The advantages are huge and not really the scope of this article but think about software updates. How hard is it to upgrade to a new version of Microsoft Office on a single computer? Now image doing that on 20 computers, or 100 or even 1000. With SaaS you don’t do any upgrades, you simply login to the web site. The owners of the web site do the upgrades and all of the thousands (possibly millions) of users worldwide are upgraded.
SaaS is taking off big time. Many of the services are sold on a monthly basis so if an employee is taking a three-month sabbatical then you can cancel their account and resume when she comes back.
Hank Williams’ company is developing a SaaS application and also an iPhone app. He points out that the Apple Tax is going to stifle his business as well as competition. (See his other posts on the subject here and here.)
Are the big SaaS companies going to make Apps for iDevices knowing that 30% of the monthly fee is going to Apple? No. The real value of these Apps is that they promote the iPad/iPhone, not the other way round. So why take a 30% hit every month to swell Apple’s coffers? That is simply not good business sense; the 30% is akin to protection money.
From Steve Jobs’ quote it appears that just being in the App Store is enough to guarantee many more users signing up. So much so your marketing budget will shrink by the same amount. But this is bollocks. You’ll still need a web site, you still need to promote your product and if you have iDevice app you’ll still link to it. And for helping Apple sell more devices the Mafia will take a 30% cut.
Lovely.
Only trust Apple to screw you.
With enclosed systems you are always at the behest of those in charge. Apple has changed it mind so many times on what can and what cannot be done or sold in its App Store that the only thing you can take for granted is that eventually you will be screwed by Apple.
The future.
There is a way of bypassing Apple completely and making something that is available on iDevices and everywhere else there is a web browser – web applications.
Don’t wait for Apple to screw you and don’t get locked into a single company. Do not create an App for the iPhone/iPad/Android/Blackberry etc. Create a fantastic web site that works with them all. You will have more exposure and more importantly, total control.