This post will provide analysis, commentary, and context on Apple’s recent decision regarding the rejection of the Sony Reader from the App Store. According to AllThingsD, Apple has not made changes to the App Store guidelines but rather, they are enforcing a rule. Apple’s statement:
“We have not changed our developer terms or guidelines”. “We are now requiring that if an app offers customers the ability to purchase books outside of the app, that the same option is also available to customers from within the app with in-app purchase.”
I’ll leave others to discuss this guideline elsewhere as my goal is to discuss the strategic implications of this guideline for Apple and its competitors.
What is Apple’s motivation?
Why would Apple want to enforce this rule by ensuring that Apple’s customers can make an in-app purchase? At a basic level, Amazon’s Kindle and Sony’s Reader are competing platforms. Apple would like to prevent these rival platforms from building up their consumer side by riding the iTunes / App Store coattails at Apple’s expense.
Two issues are at play here, “switching costs” and “lock-in”. Let’s discuss the switching costs issue first. Apple is currently in a process of building a user base for its iBooks app and its associated iBookstore – these work together to enable iPad, iPhone, and iPod touch users to purchase e-books. As this feature is currently in its infancy, iTunes users that purchase e-books are not likely to have a large collection of material, their outlay is likely to be low. As a result, their willingness to switch to a competing platform would be higher.
In terms of lock-in, Apple wants to keep its customers within the Apple ecosystem. A single iTunes account enables a customer to purchase goods from iTunes, the App Store, and the Mac App Store. In terms of usability, it would be easier for a customer to purchase goods with a single account, their iTunes account rather than have multiple accounts across vendors.
Apple wants its cut
Allowing competitors to sell goods without Apple profiting as a middle-man (the platform provider) ultimately undermines the iBooks app, the iBookstore, the App Store, and iTunes. Whew, that was long-winded!
Apple would prefer that iTunes users to stay on iTunes and is willing to ensure they remain on iTunes. With each digital music, app, and e-book sale on iTunes, Apple is able to extract a profit because iTunes is a transaction platform. Apple can “ring the register” from each sale between a consumer and content provider. Scale is what matters here, Apple facilitates these transactions and wants to ensure that it take its cut. Apple’s in-app purchase guideline has ensured that the company can continue to take its cut on e-book sales be it from iBooks or from competing offerings.
Problems for the competition
This actually causes a problem for Amazon and Sony as their goal is to do the same, extract a profit on each sale. Not only do Amazon and Sony have to pay their content providers they also have to pay Apple a cut on each in-app sale. Uh-oh, an added expense that leads to margins getting squeezed! In fact, competitors might even loose money on these types of transactions. Amazon, Sony, and others might be willing to accept this to protect their platforms but such a strategy isn’t viable over the long term. At some point, it becomes a losing proposition such that they may decide to pull their apps from the App Store.
For Apple, this is an excellent two-pronged strategy! Apple can argue that a decision to pull an app was made by the developer, not by Apple. Apple can fend off allegations that they are locking out competition while they simultaneously undermine competing e-book platforms with each in-app purchase.
The platform matters
We can read into this move from Apple as a signal, the platform is what matters. Strategic actions to ensure that Apple can extract a profit on each sale in the ecosystem will be protected.