Good morning,
I was on This Week in Tech yesterday talking about golden keys, Tesla, Facebook and more. I also recorded one more podcast late last week that I’m pretty excited about, but it’s not posted yet — stay tuned.
In addition, it is looking likely that the EU will soon charge Google with anti-competitive behavior when it comes to Android and the requirement that phone makers pre-load Google apps. I wrote about this case a year ago when the European Commission opened its investigation; I think it’s a much bigger deal than previous charges against Google, and not simply because of the massive potential fine. Look for more when and if the charges drop.
On to the Update:
App Store Search Ads
A very interesting rumor from Bloomberg:
Apple Inc. has constructed a secret team to explore changes to the App Store, including a new strategy for charging developers to have their apps more prominently displayed, according to people familiar with the plans. Among the ideas being pursued, Apple is considering paid search, a Google-like model in which companies would pay to have their app shown at the top of search results based on what a customer is seeking. For instance, a game developer could pay to have its program shown when somebody looks for “football game,” “word puzzle” or “blackjack.”
Paid search, which Google turned into a multibillion-dollar business, would give Apple a new way to make money from the App Store. The growing marketing budgets of app developers such as “Clash of Clans” maker Supercell Oy have proven to be lucrative sources of revenue for Internet companies, including Facebook Inc. and Twitter Inc.
The reactions to this news were fascinating; the Apple universe was flabbergasted — Apple blog The Loop was representative in stating “this seems like a very un-Apple thing to do”, and John Gruber said it “sounds like a terrible idea” — while the rest of Silicon Valley was, well, flabbergasted as well: flabbergasted it took so long. Bill Gurley said on Twitter he was “super-surprised this didn’t happen years ago” and added it “sound[ed] right” to him that Apple “gifted” Facebook a $4 billion/year revenue stream; Chamath Palihapitiya claimed paid search was “a simple way to add $200 billion of market cap if FB market cap is proxy for value of app installs.”
Personally, I think both sides need to take a deep breath.
First off, while this is just a rumor, it’s actually not surprising at all if you think back to Apple’s last earnings call. For that call — the first to forecast lower year-over-year growth for the iPhone — CEO Tim Cook and especially CFO Luca Maestri spent a substantial amount of time trying to sell the narrative that Apple was a services company. They even made a special presentation for the occasion which I criticized at the time for trying to have it both ways: in the presentation Apple tried to say it was a $31.2 billion services company, but it got to that number by including the 70% of app purchases it pays out to developers; the reason this is problematic is that one of the reasons services are so attractive to Wall Street are their high gross margins (and 30% is not a high gross margin). To be sure the $19.9 billion Apple does generate from services — the majority of which is their 30% share from the App Store — is impressive, but that presentation was a real flag.
So here’s the question: if Apple was willing to create a questionable financial measure to sell the services narrative, should we be at all surprised the company is (allegedly) creating actual new revenue-generating services products as well? And indeed, paid search ads for apps is the obvious place to start: as the linked VCs and lots of other commentators have noted, the app install market is massive, and search results are a powerful place to put ads.
Moreover, it’s a place that is especially suitable for Apple: what makes search ads so effective is that the user has already signaled exactly what they are looking for with their search term. This relieves Apple of the need to gather and leverage an extensive amount of user data to help advertisers further refine their targeting, which the company has declared it won’t do. True, such data would make the search ads even more effective, but one of the benefits of a monopoly (on iOS App Store search results) is that you can get by with a subpar product.
This point, though, emphasizes why comparing Apple’s revenue opportunity to Facebook is way off-base; Facebook has three big advantages for app makers over Apple:
- First, the problem facing the vast majority of app install advertisers is not discovery but rather awareness. To that end Facebook and its News Feed ads are a much better advertising unit (in the same vein as TV)
- Secondly, while this applies to all app install advertisers, free-to-play games — which make up the biggest part of the market — are focused on reaching potential customers who are likely to become digital whales based on the app makers’ deep understanding of their existing user base; for this Facebook with its unmatched targeting capability cannot be beat; indeed, Apple is not even in the game
- Third, iOS search ads only apply to…iOS! Android has the most app downloads and, if you include Chinese app stores, the most revenue (the most relevant measure for this discussion, given that Facebook is banned in China, would be iOS ex-China versus Google Play, but I wasn’t able to nail those numbers down; they are almost certainly close though, although the App Store has a healthy lead in U.S. revenue). Even if Apple’s rumored ad program were competitive with Facebook (which it’s not), it certainly couldn’t replace all of it.
This Android point actually confirms the first two: Google rolled out Search Ads in Google Play last July, and Facebook has only gone from strength-to-strength. Indeed, contra Gurley, app install ads are a great example of why I wrote Peak Google and The Facebook Epoch; Apple can certainly use search ads to add some incremental high-margin revenue (yay services!) without too much effort, but it won’t change the trajectory of either Apple or Facebook.
As for the concerns of Apple bloggers that such a scheme will reinforce the tendency of the App Store to ensure the rich get richer, well, I’m sorry to say but there is no evidence that Apple cares. The company has done nothing to help developers with more traditional business models (i.e. not pay-to-play games) monetize; indeed, in a telling twist the team working on this search ad product is the former iAd team, which Steve Jobs himself said existed so that apps could be as cheap as possible. The Occam’s Razor conclusion is that Apple is actually serious about their services business or, perhaps more accurately, hopeful they can offer an alternative narrative to Wall Street alongside what might be a very tough earnings report.
Amazon Splits Up Prime
From the Wall Street Journal:
Amazon.com Inc. is firing a shot across the bow of Netflix Inc. by attempting to become a primary destination for streaming video. The Seattle online retailer said Sunday it will begin offering its video-streaming service as a stand-alone option for the first time. A monthly subscription will cost $8.99, a dollar less than the most popular plan from Netflix.
Amazon has been offering its video service as a perk for subscribers of its $99 annual Prime shipping service. Prime membership also will be offered monthly for the first time to all U.S. customers for $10.99, Amazon said Sunday. An Amazon spokeswoman said the new monthly option could be turned off or on as customers wished, a possible benefit for shoppers during the busy holiday season.
At first glance I find the “also” part of this announcement more interesting: a lower entry point for Prime’s shipping benefit, both in terms of money and in commitment, certainly has the potential to increase the number of customers willing to try it out. The big question is what the balance will be between customers who simply sign up for, say, the holiday season, and then cancel for the rest of the year, and those who in a month’s time come to appreciate just how much Prime and defaulting to Amazon can dramatically shift your purchasing habits for the better (in my educated opinion!) and stick around. One of the benefits of an annual commitment is that $100 already spent is a good motivation to shift one’s buying habits to ensure you’re getting your money’s worth (which subsequently reveals the experience benefits), while a monthly option could leave Amazon with big shipping bills every Christmas.
That said, remember who we’re dealing with: I strongly suspect Amazon is very confident the benefits outweigh the risks; remember that the retailer offered a free trial of Prime last Christmas. Amazon probably just finished analyzing the data and determined that a month is plenty of time to convert, so here we are.
The separation of Prime Video is more surprising: part of what made Prime Video so intriguing was that it had to date competed orthogonally with Netflix and HBO in that it (presumably) monetized via increased e-commerce. Now it is arguably switching models.
One reason is likely international: as Netflix has demonstrated one of the advantages of owning original programming is the ability to sell the service globally, which is a very good thing for any business with massive fixed costs (i.e. producing original content) and minimal marginal costs (primarily CDNs and bandwidth, which, given AWS’ global footprint, are cheaper for Amazon than anyone). Selling Prime Shipping to someone living in, say, Taiwan, doesn’t make much sense, but selling Prime Video does.
However, this separation also makes sense in markets where Amazon operates: as Prime Video starts producing more must-see shows, it will be awfully tempting for folks inclined to try for a month to simply pay $2 more and try out Prime shipping too, and then — presuming I’m right about Amazon’s read of the market — they’re hooked.
The Kindle Oasis
A quick note on Amazon’s new e-reader, which offers a unique industrial design and a cover that increases the battery life to “months and months” for a shockingly high price of $289. In short, it makes sense!
Lots of folks are wondering why Amazon would charge so much when you can simply read a book on your tablet or phone, but folks who are doing that are not the target market. Dedicated e-readers are niche devices, and the appropriate approach to a niche is to maximize revenue-per-customer by delivering features they really care about. Customers who care only about price aren’t buying e-readers anyways (and Amazon is still selling an $80 model for the beach, the pool, etc.).
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