Apple wants it’s App Store cut – e-book platforms take note

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.

Recent New York Times articles discuss the Apple platform

In my January 10, 2011 post Despite what you think, Apple is a platform company, I took the position that Apple is a platform company that sells hardware and software.  I also described how network effects is driving Apple’s current growth.

Two recent articles posted at the NY Times take similar positions by discussing Apple as a platform provider.

Steve Lohr, in his January 31, 2011 The Power of the Platform at Apple article, highlights how Apple is now a platform company:

“The more people buy iPhones and iPads, the more software developers and media companies want to write applications for them, as various as games and digital magazines. And consumers are more likely to buy iPhones and iPads when more entertainment and information applications are available on them. The combination of hardware, software and services is what corporate executives, economists and analysts call a platform. Successful technology platforms sustain and reinforce growth. And this self-reinforcing cycle is known as a network effect. It helps the platform owner and raises a barrier to competitors.”

The article goes on to reference the following statement from Michael A. Cusumano, a professor at the Sloan School of Management at M.I.T.:

“Apple has hit that magical combination of gradually shifting from a product to a platform strategy”

Claire Cain Miller and Miguel Helft, in their February 1, 2011 article, Apple Moves to Tighten Control of App Store, describe Apple’s attempt to lock out rivals from the App Store platform:

“The company has told some applications developers, including Sony, that they can no longer sell content, like e-books, within their apps, or let customers have access to purchases they have made outside the App Store.”

The article quotes James L. McQuivey, a consumer electronics analyst at Forrester Research:

“This sudden shift perhaps tells you something about Apple’s understanding of the value of its platform,”  “Apple started making money with devices. Maybe the new thing that everyone recognizes is the unit of economic value is the platform, not the device”

These articles complement my position that Apple is now a platform company.  In an upcoming post, I’ll provide some commentary and context about Apple’s decision regarding the Sony app and what it means for Amazon’s Kindle platform.

Despite what you think, Apple is a platform company

Last Thursday, Apple launched the Mac App Store, an application / software store for the company’s Macintosh computers that brings Mac software developers together with Mac OS X users in an experience that mirrors the company’s iTunes App Store for iPhone, iPad, and iPod.

The Mac App Store is another platform for Apple whereby the company plays the role of provider to bring entities together. At the current time, this encompasses customers and developers. The Mac App Store is simply an extension of Apple’s overarching platform strategy. Over the past decade, Apple has made the shift from a hardware and software company to a platform company. This transformation accelerated in 2007 when the company launched iPhone and iPhone OS. I won’t discount the fact that they sell hardware and software but these are now utilized by the company to bring users onto the various platforms.  Apple’s internal activities and culture work to support the platform strategy across the various departments, and customer contact points.

A Multi-platform provider
At a basic level of analysis, Apple is a multi-platform provider that designs and sells hardware to support the following platforms:

Apple Platforms

Digging deeper we can see that Apple has begun to systematically merge these platforms into a comprehensive Apple platform / ecosystem.  I expect that this unification strategy will continue to take shape with iTunes continuing to play a key role.  As you can see above, iTunes exists on every one of listed platforms.

iTunes – a key to the Apple platform strategy
Apple’s shift away from a hardware and software company to a platform company started with iTunes. If you ever watched an Apple keynote you would have been keen to focus in on a metric that Apple executives routinely tout when they discuss iTunes, the number of accounts with credit cards. As of September 2010, this number stood at 160 million. Why does Apple tout this metric? It’s a signal, plain and simple. Apple is sending a signal to the platform participants, consumers, developers, and advertisers about the size of the consumer “side”. If you’re a consumer, you’ll interpret this number as a measure of the platform’s popularity. A higher number will encourage those without an iTunes account to join because friends and family have accounts. Conversely, by knowing the size of the consumer side, developers and advertisers interpret their reach potential – more consumer accounts translates to a higher probability of sales. It also signals to non-consumer users that the platform is the ‘place to be’ which encourages more to developers and advertisers join. Apple also touts the number of apps with a similar signaling objective.

The platform essentially feeds on itself such that overall platform growth is driven by the growth in the various user types. It’s network effects – a process by which the value of the network is dependent on the number of users across the network. Same side and cross side network effects are at play.

There you have it, Apple is a platform company that happens to sell hardware and software.

Anyone care to offer some predictions as to how this strategy projects out?