Matthew Brooker, writing for Bloomberg Opinion, is worried about Xi Jinping leading China into a trap:
The middle-income trap describes how economies tend to stall and stagnate at a certain level of development, once wages have risen and productivity growth becomes harder. Relatively few make the transition to high-income status. The history of those that have, such as South Korea and Taiwan, points to a need for the state’s role to retreat as markets advance. Ad hoc interventions by governments may work at more basic levels of development. At higher income levels, economies become too complex for command-and-control management by individuals. Systems are increasingly what matters. Rules that are transparent, predictable and fairly applied enable market forces to take over the job of directing economic activity, raising efficiency and allowing innovation to flourish.
This inevitably implies some ceding of power by the rulers. It also potentially implies political change. South Korea and Taiwan both transitioned from authoritarian to democratic political systems as they became richer. The largest high-income economies are almost all democracies. Xi, a believer in the historic mission and preordained victory of the Communist Party, is far from receptive to such a message. The party has embraced markets, but from a position of superiority. Like laws, they are there to be used, when useful; the party remains supreme, above all.
I have spent a fair bit of time over the last few months discussing China’s recent crackdown on its tech industry; to me one of the most interesting questions is whether China’s renewed quest to catch up technologically, particularly in the area of semiconductors, might suffer from the country’s recent crackdown. Dan Wang argued in Foreign Affairs (and previously, in a Stratechery Daily Update interview) that U.S. sanctions were exactly the sort of spur the country needed:
China’s private entrepreneurial firms have driven the bulk of the country’s technological success, even though their interests have not always aligned with the state’s goal of strengthening domestic technology. Beijing has, for example, recently begun cracking down on certain consumer Internet companies and online education firms, in part to redirect the country’s efforts towards other strategic technologies such as computer chips. This has meant that China’s most impressive technological achievements—building state-of-the-art capabilities in renewable energy, consumer Internet services, electronics, and industrial equipment—have as often been driven in spite of state interference as they have because of it.
Then came U.S. President Donald Trump. By sanctioning entrepreneurial Chinese companies, he forced them to stop relying on U.S. technologies such as semiconductors. Now, most of them are trying to source domestic alternatives or design the necessary technologies themselves. In other words, Trump’s gambit accomplished what the Chinese government never could: aligning private companies’ incentives with the state’s goal of economic self-sufficiency.
What happens, though, if the priorities of those private companies shifts from winning in the market to satisfying the Party? Is there a cost to losing world-class founders and entrepreneurs like ByteDance CEO Zhang Yiming and Pinduoduo CEO Colin Huang? It is one thing to align private incentives with state incentives; it is an open question if doing so by removing the drive for dominance and outsized profits ends up being a case of one step forwards, and two steps back.
Tech Epochs
In 2014 I described the The Three Epochs of Consumer Tech to that point; to summarize my argument (which, as is always the case seven years on, isn’t perfect):
- The PC epoch had Windows as its operating system, productivity software as its killer app, and email was the dominant communications medium.
- The Internet epoch had the browser as its operating system, search as its killer app, and social networking, particularly Facebook, was the dominant communications medium.
- The mobile epoch had iOS and Android as its operating systems, the sharing economy as its killer app, and messaging was the dominant communications medium.
At the time I posited that the next epoch was unclear; I listed wearables, Bitcoin, and mobile applications like Uber as possibilities, although settled on messaging as being the most likely to be the fourth epoch.
Then, in 2020, I argued we had reached The End of the Beginning:
There may not be a significant paradigm shift on the horizon, nor the associated generational change that goes with it. And, to the extent there are evolutions, it really does seem like the incumbents have insurmountable advantages: the hyperscalers in the cloud are best placed to handle the torrent of data from the Internet of Things, while new I/O devices like augmented reality, wearables, or voice are natural extensions of the phone.
In other words, today’s cloud and mobile companies — Amazon, Microsoft, Apple, and Google — may very well be the GM, Ford, and Chrysler of the 21st century. The beginning era of technology, where new challengers were started every year, has come to an end; however, that does not mean the impact of technology is somehow diminished: it in fact means the impact is only getting started.
Indeed, this is exactly what we see in consumer startups in particular: few companies are pure “tech” companies seeking to disrupt the dominant cloud and mobile players; rather, they take their presence as an assumption, and seek to transform society in ways that were previously impossible when computing was a destination, not a given. That is exactly what happened with the automobile: its existence stopped being interesting in its own right, while the implications of its existence changed everything.
That article was about the overall shift in computing from mainframes to PCs to mobile, which mirrored the shift from one room computing to desktop computing to cloud computing:
This is a progression where the potential for crypto-based computing and its inherent decentralization fits right in (especially as politically-motivated tech companies provide the impetus).
Note, though, that these two articles don’t mirror each other exactly: Epoch 2, the Internet epoch, wasn’t really about the underlying hardware at all; rather, it was the PC epoch that provided the foundation for the Internet epoch. Google and Facebook would have been much less valuable if there weren’t already hundreds of millions of people with PCs and Internet connections; a similar reduction in value would have occurred if Microsoft had been able to control what people accessed on the web, and on what terms.
It was the Internet, meanwhile, that gave mobile the fuel to get off of the ground; remember how Steve Jobs introduced the iPhone:
Jobs wasn’t wrong — Apple absolutely did reinvent the phone — but it did so on the back of concepts that already existed: the iPod, mobile phones, and, most importantly, the Internet. And then Apple introduced the App Store.
The App Store Economy
Thirteen years on and its easy to lose sight of just how important Apple’s approach to the App Store was not only for the iPhone but also developers. John Gruber, in the wake of South Korea passing a law opening up in-app payments, wrote on Daring Fireball:
I think the latter half of Apple’s statement is true — user trust in in-app purchases will decline…there’s no denying that the result of any of these laws would be to make iOS and Google’s Android more like Macs and PCs. There’s also no denying that people make far more digital purchases and install far more apps on their mobile devices (iOS or Android) than their PCs (Mac or Windows)…
But I am confident that the overwhelming majority of typical users are more comfortable installing apps and making in-app purchases on their iOS and Android devices than on their Mac and Windows PCs not despite Apple and Google’s console-like control over iOS and Android, but because of it. And if these measures come to pass and iOS and Android devices are forced by law to become pocket PCs, I think there’s a high chance it’ll prove unpopular with the mass market. The masses are not clamoring for the app stores to be opened up. These arguments over app stores are entirely inside baseball for the technical and business classes. I’ve had non-technical friends and relatives complain to me about all sorts of things related to their iPhones over the last 10 years, but never once have any of them said to me, “Boy, I sure wish iPhone apps and games could ask me for my credit card number to make purchases, and that the overall experience of using apps was more like the anything-goes nature of using the web or my desktop computer.” Never. It doesn’t just seem that the unintended consequences of such legislation is being under-considered; it seems as though it’s not being considered or acknowledged at all.
Perhaps I’m wrong, and it’ll all work out just fine. Anyone who claims to know how such a scenario will turn out is full of shit. But from what I’ve seen over the last few decades, the quality of the user experience of every computing platform is directly correlated to the amount of control exerted by its platform owner. The current state of the ownerless world wide web speaks for itself.
It’s easy for developers to measure the 30% that Apple takes of their earnings, or the cost it takes to implement the company’s in-app purchasing APIs, or the time it takes to deal with App Review. It’s much harder, particularly in 2021, to appreciate the extent to which Apple increased the total addressable market for everyone, not simply by inventing a device that could be used everywhere, but also by enforcing a distribution model that made consumers feel safe and thus willing to try out far more apps than they ever did on PC. And Gruber is right, that even now it is possible that loosening the App Store rules might have unintended consequences on those same developers chafing under Apple’s control.
At the same time, I think that Gruber underrates the impact of the “ownerless world wide web”; yes, I myself wrote an article in 2015 entitled Why Web Pages Suck,1 and yes, that is an inevitable outcome of a lack of centralized quality control. An arena where anything goes, though, doesn’t simply make it possible to produce garbage, but also things that are completely new to the world: rules that limit bad things have the unfortunate side effect of limiting good things that the rule-maker never considered.
One example, if I may be so immodest, is this site: not only did I not have the wherewithal to build an app in 2013, the App Store only offered Newsstand subscriptions for established publications; I could, though, build a web page, and leverage services like Stripe to charge subscriptions. Yes, Apple has since expanded the use of App Store subscriptions, but in almost all cases that support has chased use cases, from streaming to reading to video to collaboration and cloud services, that were first pioneered on the ownerless world wide web.
What is new to the App Store are the shift of more and more productivity applications to subscription billing. This trend, to be fair, started with Microsoft and Adobe, but even basic utility apps have followed suit. What is not clear is if, in a vacuum, this is particularly good for their business: for years small apps thrived on the PC and especially the Mac by leveraging Internet distribution and monetizing via paid upgrades, which struck a balance between making more money from your best customers, a necessity for every business, without introducing subscription fatigue and a sense of resentment from marginal customers not sure if they can justify the ongoing expense.
The App Store, though, is not a vacuum: it is an economy where Apple sets the rules, and I’ve been writing about how traditional developer business models simply weren’t enabled for as long as this site has been around; by 2015 it seemed clear that the era of mobile productivity apps was going to be a disappointing one:
That, then, means that Cook’s conclusion that Apple could best improve the iPad by making a new product isn’t quite right: Apple could best improve the iPad by making it a better platform for developers. Specifically, being a great platform for developers is about more than having a well-developed SDK, or an App Store: what is most important is ensuring that said developers have access to sustainable business models that justify building the sort of complicated apps that transform the iPad’s glass into something indispensable.
That simply isn’t the case on iOS. Note carefully the apps that succeed on the iPhone in particular: either the apps are ad-supported (including the social networks that dominate usage) or they are a specific type of game that utilizes in-app purchasing to sell consumables to a relatively small number of digital whales.
Six years on and not much has changed; iPad hardware continues to improve, the consumption experience remains fantastic, and the Pencil has unlocked interesting new use cases. Killer apps, though, that are uniquely possible on the iPad, are still quite rare; Apple pitches the device as a PC replacement, but even then the most advanced demo is Photoshop. It is as if the iPad specifically and productivity software on iOS generally is in a sort of “middle-income trap”: the obvious tools are there, and giant software developers with their subscription plans can justify building complex apps, but the innovation in the ecosystem has never lived up to Jobs’ vision.
Challenges, Creators, and Metaverses
I do think the mobile productivity ship has sailed, particularly in terms of the iPad. It’s a fine device with fine apps, and it’s great for consuming media. And, I should note, Apple sold $30 billion worth of the devices over the last 12 months. That is hardly a flop — quite the opposite, in fact.
Go back to the analogy at the beginning of this Article, though: a country in the middle income trap is by nearly every objective measure a massive success. That is certainly the case for China, the development and growth of which has done more to alleviate human poverty than any event in human history. Today China is in many sectors, particularly labor-centric manufacturing, the most advanced economy in the world, with world-class cities and infrastructure that puts much of the U.S. to shame. The challenge now, though, is to not simply catch up to the West but to surpass it, and that means innovation in ways that go beyond applying Western technology to China-specific use cases and taking advantage of leapfrog opportunities (like payments); whether that innovation can be achieved as control is re-centralized is one of the most important questions of the next decade.
Apple, meanwhile, is seeing more challenges to its centralized control of the app economy than ever before, from antitrust lawsuits to potential legislation to run-ins with regulators around the world. At the same time there is an ongoing explosion in completely new digital-first business models, including the so-called creator economy and meta-verses like Roblox, and over the horizon, the crypto-economy.
It is those challenges that will, slowly but surely, force Apple to give up control. Last week’s news that Apple, after settling with the Japan Fair Trade Commission, will allow “a single link” to ‘reader’ apps2 on a worldwide basis suggests a new more open approach and a stubborn refusal to give up iron-fisted control of the App Store economy all at the same time. Time will tell if Apple decides to rethink the App Store in one fell swoop, or if regulators dismantle Apple’s regime piece-by-piece, and potentially geography-by-geography, in a way that harms Apple’s core business.
What is important, though, is that these changes happen sooner rather than later, for the sake of tech’s fourth epoch.
The Fourth Epoch
If consumer tech’s second epoch — the Internet — was built on and enabled by the first — the PC — then it follows that the fourth epoch is built on and enabled the third. Both the creator economy and metaverses fit the bill: yes, some creators can make a go of it on the web, but I’ll be the first to say that that is only possible because of social networks. What seems more likely are that creators emerge on platforms built to accommodate them, and those platforms themselves will sit on top of mobile. That is even more likely to be the case when it comes to metaverses, which are likely able to deliver superior experiences as a native app than as a web app.3
The problem is the App Store: if Apple is taking 30% of every transaction, and the platform owner their own share for having created the opportunity and toolset for the creator, then that means creators need that many more fans to make a living, reducing the number who are successful. It’s the same story for metaverses: Roblox isn’t remotely profitable, even as it pays its developers pennies-on-the-dollar, thanks in large part to Apple taking 30% for the pleasure of existing on iOS. Apple is absolutely right that the App Store created economic opportunity; it is also taking it away from an expanding universe of creators and developers who have no reason to interact with iOS APIs.
What is particularly frustrating about this state of affairs is that it is not as if Apple is making things easier for creator platforms: look no further than Twitter’s new super-follows feature, which is easy-to-understand from a user perspective — pay X amount of dollars to get access to subscriber-only tweets — but only because Twitter is creating in-app subscriptions by hand for every super-tweeter, and even then is limited to 10,000 in-app purchase options. Other creator platforms like Twitch create convoluted token-based subscription schemes to get around Apple’s in-app purchase limitations that obfuscate prices and result in worse outcomes for the creators in terms of retaining customers; customers, meanwhile, pay more in the app than they do on the web to cover Apple’s fees; these fees, quite clearly, exist because of the company’s total control of apps, not because any value is being provided.
Of course these are big well-known companies fighting with the biggest, most well-known company; the question, as always, is about the companies that aren’t formed, the creators that aren’t empowered, the metaverses that die on the vine because developers couldn’t make money, or the platform creator couldn’t justify the risk. Looking back it’s easy to see how Microsoft and Windows could have stifled the Internet epoch; Apple (and Google!) ought not hold back the full potential of the app-platform epoch.
Epoch Bridges
I’ve written a lot about the App Store over the entire course of Stratechery generally, and over the last year specifically. Yes things are hopefully changing, and that is a reason for analysis, but I could see an argument that emerging technologies like crypto are much more interesting.
To that point, though, it’s worth noting that there is one additional reason beyond greed or control of the customer experience why Apple and Google might not be motivated to loosen their control of apps: if crypto is tech’s fifth epoch — and there is a very good chance that is the case — then it is very much in the crypto-industry’s interest to pay attention to and weigh in on these App Store battles. Remember that the Internet provided the bridge from the PC to mobile; in a well-functioning market apps and platform-level APIs would provide the bridge from mobile to crypto. Just think about all of the obstacles there are in making crypto applications user-friendly and accessible to general users, and how much more would be possible if mobile were as open and configurable as the PC.
And, of course, it is worth considering how bad that might be in the long run for Apple and Google. If those in power are primarily concerned with protecting their position then perhaps it is inevitable that innovation is a casualty.
I wrote a follow-up to this Article in this Daily Update.
“Reader” apps are defined in the App Store Guidelines as apps that “allow a user to access previously purchased content or content subscriptions (specifically: magazines, newspapers, books, audio, music, and video).” ↩
The question as to whether Apple is handicapping mobile Safari is separate but related. ↩