I think especially GarageBand is a bad example, because in the realm of Music and Audio apps there seems to be a thriving business with lots of much, much more capable and (all in all) much better apps (not in breadth, but in depth) – with higher prices as in the rest of the App Store. And those who look out for really good musical instrument apps, and who use them on a regular basis, buy them (instead of GarageBand, or rather in addition to it).
One example could be Auria – a “Digital Audio Workstation” – sold for $50 (and a light version for $25 with In-App-Purchase to get to the full version): GarageBand can’t hold a candle to it. And there are Synths a lot, beating the shit out of GarageBand. And an app like iGrand Piano, that sounds like *real* pianos – at least compared to GarageBand’s Piano that sounds like … uhm … don’t get me started!
I don’t know how well all those apps (and programmers/companies) fare in revenue…
Here’s the thing: I’m not entirely sure either who is succeeding and who isn’t. Something I would like to do over the coming months is write profiles of all kinds of apps with a clear focus on economics, not features.
What works? What doesn’t? And what can platform owners do about it – if indeed
they even care.
I got some great feedback on yesterday’s post about Apple and sustainable apps. I wanted to highlight one email in particular.1 A reader writes:
Another way of framing the situation is by contrasting iOS hardware and OS releases against App Store monetization options. Hardware (CPU, graphics, RAM, display resolution) and iOS (APIs and frameworks) have consistently outpaced monetization innovations. The gap grows wider every year, and will do so again with the launch of iOS 7 and new devices this fall.
I consider GarageBand for iOS the example par-excellence of the kind of apps not being made. GarageBand is over two years old now, and is still unrivaled by any third-party iOS app in technical breadth and depth. It uses every ounce of hardware and OS power it can muster. A faster iPad means a snappier, more robust GarageBand experience.
It would be an interesting thought experiment to estimate gross sales revenue for GarageBand and contrast it with an educated guess for the capital it would require to hire the engineers, designers, and musicians needed to build it. I would not be surprised if GarageBand is an enormous loss-leader for Apple.
One mistake I’ve made in this series is not being precise about what I mean by a sustainable business. In fact, I’ve gotten a fair bit of feedback from developers who work alone and make a living on the app store.
That’s fine as far as it goes, but truly transformative apps, like Photoshop a generation ago or GarageBand today (or Paper), require true, multi-employee businesses. And, it’s precisely those types of businesses – outside of casual games – that don’t seem viable as app store-only endeavors.
In fact, the GarageBand example does more to reinforce my argument than any other app. As I wrote yesterday:
But there have been downsides to this paranoia. Apple’s inefficient use of its cash is the most famous, but I think developer hostility is an aftereffect as well. I would go so far as to argue that that Boston keynote was at the root of Jobs’ opposition to any 3rd-party apps on the iPhone, much less app store policies that enable sustainable businesses. Never again would Apple be held hostage to an app that was bigger than Apple.
Most of the best, most technologically complex productivity apps on the iPad – GarageBand, iPhoto, iMovie, iWorks – are made by Apple.2 I agree with my reader: they’re certainly an enormous loss-leader, but crucially, Apple controls them. That’s something that Apple has always considered priceless.
This series of posts is about enabling sustainable businesses on the App Store. In Part 1, I discuss why Paper and other productivity apps may not be doing as well as you might think. Part 2 explores why casual games, in contrast, are a sustainable business, but not a differentiator for platforms (I added a follow-up here). Part 3 analyzes why Apple in particular seems hesitant to enable sustainable businesses on the app store.
I love apps, especially productivity apps. If games are all about user input, with minimal app output, and consumption apps about app output, with minimal user input, productivity apps are about both. You put something into an app, and the app returns something back to you, better.
Think about Photoshop, or Excel: you put in data, and the data is returned to you, transformed. Same thing with a text-editing app, or a calculator, or a mileage tracker. Productivity apps add value, and the more you use them, the more valuable they become.
Unfortunately, productivity apps are a terrible match for app store economics. The app store favors:
Simple, inexpensive apps that are downloaded by a lot of people
Free front-ends for for-pay or advertising-based services
The solutions for enabling sustainable productivity apps are actually pretty obvious – just look at how productivity apps make money elsewhere:
More expensive apps with trials
Paid updates
Built-in subscription support
And yet, iOS 7 introduces radical change in nearly everything except for app monetization. Why doesn’t Apple do more to enable sustainable businesses on the app store?
I see a few reasons, ranging from the concrete to the more speculative.
Apple’s business model devalues developers
Apple makes money on hardware. It’s in their interest that said hardware be sold for as much of a premium as the market will bear. However, it’s equally in their interest that the complements to that hardware are sold as cheaply as possible, and are preferably free.
That is why, for example, iOS updates are free, and OS X updates nearly so. Both cost hundreds of millions of dollars to develop, but they only exist to sell more hardware, not to make money in and of themselves.
This is standard strategy, especially in technology. Look at Google: the vast majority of their services are free because they want to drive usage in order to capture signals and serve ads. Microsoft, which has felt the pain of Google commoditizing services and Apple commoditizing OS updates, did the same thing to hardware makers: Windows supported everything under the sun because the increased competition would drive down the cost of hardware, leaving all of the profit to Microsoft.
In the case of apps, the current app store, full of a wide variety of inexpensive apps, is perfect from Apple’s perspective. It’s a reason to buy Apple hardware, and that’s all that matters. Anything that on the surface makes the store less desirable for hardware buyers – such as more expensive apps – is not in Apple’s interest.
Developers don’t have an advocate on Apple’s leadership team
Scott Forstall started at NeXT. He was a major contributor to NeXTStep, and then to OS X. He had every reason to be a fierce proponent of Cocoa, the NeXTStep-derived API that was native to OS X. Yet it was Forstall, in his role as director of API frameworks, that pushed for Carbon, the API that maximized backwards compatibility with Mac OS 8 and 9. More recently, it was Forstall, as head of iOS, who pushed most forcefully for 3rd-party apps to be allowed on iOS.
Forstall proved himself, again and again, to be a huge proponent of 3rd-party developers. And he’s gone.
I get why Forstall had to go, but to be clear, it was a massive loss, especially for apps.1 There certainly remain many, many people at Apple that care deeply about apps, but the policy changes I and others are calling for will be decided at the top.
In Forstall’s absence, who in the leadership team is making the case? I haven’t seen any evidence that anyone else in that Monday morning meeting prioritizes developer issues.
Apple has been burned by productivity apps before
As I just noted, the great thing about productivity apps is that they add value, and the more you use them, the more valuable they become – the potential value of a productivity app is limited only by the amount of data you are willing to put into it.
The trouble for Apple – or any platform provider – is apps that cross that line from nice-to-have to completely irreplaceable. It’s at that point a user’s loyalty shifts from platform to app, and there are no greater examples than the aforementioned Photoshop and Microsoft Office.
Last week I transcribed significant portions of the Steve Jobs keynote at Macworld Boston. In that keynote, he described how Apple was dependent on Adobe for many of its sales, and, more famously, introduces Apple’s “partnership” with Microsoft.
Jobs’ closing speech, where he said that “We have to let go of this notion that for Apple to win Microsoft has to lose,” is well-known and still cited; however, I think the full quote is more telling (emphasis mine):
You know, where we are right now, is, we’re shepherding some of the greatest assets in the computer industry. And, if we want to move forward and see Apple healthy and prospering again, we have to let go of a few things here.
We have to let go of this notion that for Apple to win Microsoft has to lose. OK? We have to embrace a notion that for Apple to win Apple has to do a really good job, and if others are going to help us, that’s great, cause we need all the help we can get. And if we screw up and we don’t do a good job, it’s not somebody else’s fault. It’s our fault. So, I think that’s a very important perspective.
I think, if we want Microsoft Office on the Mac, we better treat the company that puts it out with a little bit of gratitude. We like their software.
So, the era of setting this up as a competition between Apple and Microsoft is over as far as I’m concerned. This is about getting healthy, and this is about Apple being able to make incredibly great contributions to the industry, to get healthy and prosper again.
The emphasis brings home the point: Jobs’ statement was completely driven by Apple’s desperate state and the fact that Apple’s potential users cared more about Photoshop and Office than they did the Mac. For Jobs especially, it must have been humiliating.
I had a unique vantage point into how Apple looks at this time in its history due to my time spent on the Apple University team, and something that struck me was the powerful impact Apple’s near-death experience had on all those involved. That Wired cover, and the fact Apple lost nearly a billion dollars in 1996, came up unprompted again and again. For those that were there, it still fundamentally shapes how they view the world and how they make decisions.
To be clear, this has tremendous value: there is nothing like near-death to realize you have nothing to lose – a great recipe to avoiding disruption. In fact, one of my concerns for Apple is what will happen when all of the old guard is gone, leaving those who have only known success.
But there have been downsides to this paranoia. Apple’s inefficient use of its cash is the most famous, but I think developer hostility is an aftereffect as well. I would go so far as to argue that that Boston keynote was at the root of Jobs’ opposition to any 3rd-party apps on the iPhone, much less app store policies that enable sustainable businesses. Never again would Apple be held hostage to an app that was bigger than Apple.
To be fair, Cook has already reversed Jobs’ position on cash. However, the enthusiasm with which he promoted $10 billion paid to developers – which I believe is mostly driven by in-app purchases in casual games – suggests he doesn’t appreciate there is a problem with the app store.
Then again, who is to say it’s a problem? I’ve already pointed out that cheap apps align with Apple’s business model.
And that’s fine, as long as the iPhone is dominant in other areas. But is it?
The Mobile Hierarchy of Needs – click image for original article
When the iPhone launched, it was, as Jobs said, five years ahead when it came to hardware and the OS. However, that was six years ago; today it’s apps that are the biggest reason to buy an iOS device (and services the biggest reason not to).
Were Apple to invest more in its ecosystem and enable sustainable productivity apps, I believe iOS could build a moat comparable to the one enjoyed by Microsoft for over two decades. Namely, for customers who care about apps, it ought to be unthinkable to consider any other platform.
While pondering this article, I was struck by this tweet from Aaron Levie:
Incumbents get disrupted because the very moats a company builds up to be successful in one era become a liability in the next.
Three years ago, I wrote an academic paper on Apple and the Innovator’s Dilemma, and argued that Apple’s narrow focus on the end-user shielded them from disruption:
Apple’s focus on user experience as a differentiator has significant strategic implications as well, particularly in the context of the Innovator’s Dilemma: namely, it is impossible for a user experience to be too good. Competitors can only hope to match or surpass the original product when it comes to the user experience; the original product will never overshoot (has anyone turned to an “inferior” product because the better one was too enjoyable?). There is no better example than the original Macintosh, which maintained relevance only because of a superior user experience. It was only when Windows 95 was “good enough” that the Macintosh’s plummet began in earnest. This in some respects completely exempts Apple from the product trajectory trap, at least when it comes to their prime differentiation.
Indeed, it seems that Apple simply isn’t very interested in moats. They do what they think is right by the user, strategy nerds like me be damned. This kills them on Wall Street, but perhaps is the only possible route to avoiding stasis, and ultimately, disruption.
This is why Apple is so fascinating.
This is a three-part series on enabling sustainable businesses on the app store.
The keynote for Macworld Boston, August 6, 1997, was pretty bizarre by today’s standards.
The first speaker was Colin Crawford, President and CEO of Mac Publications for IDG, who put on the conference. He proceeded to recount all of the dire headlines surrounding Apple. This made an appearance:
The cover of the June, 1997 edition of Wired
It wasn’t pretty.
Jobs was next. Gil Amelio had only been ousted a month previously, and Jobs hadn’t yet been named Interim CEO, much less CEO. In fact, he introduced himself as the “Chairman and CEO of Pixar.” His first slide said “Status Report,” and he claimed Apple’s problems started at the top. There would be five steps to Apple’s renewal:
Board of Directors
Focus on Relevance
Invest in Core Assets
Meaningful Partnerships
New Product Paradigm
But:
I’m not going to be talking about products today. I just wanted to let you know that we have some wonderful ideas that you’ll be hearing about between now and the end of the year.
That’s right. A Steve Jobs keynote without a single new product.
It’s really interesting to watch the entire thing – I encourage you to do so, if you can spare the 38 minutes – but I’ve pulled out two specific sections as I believe they’re pertinent to recent discussions on this blog about building sustainable apps on the app store. They pertain to Adobe and, more famously, Microsoft.
Adobe Photoshop was mentioned in the discussion on what markets Apple was relevant in. It begins at 18:46:
Next, Market Focus.
I can’t get anyone to tell me the definitive market share for Apple but it’s around seven percent from all I can gather, and the question is where is Apple relevant? Where is Apple still the dominant player? Which market segments? And there are two.
The first one I call creative content. It’s publishing, design, prepress, etc. It’s creative professionals using computers. And what’s interesting is Apple is still the dominant market leader for creative professionals by far. It’s like 80 percent of the computers used in advertising, graphic arts, design, prepress, all Macintoshes. And 64 percent is the best number I could find. 64 percent of all Internet websites are created using the Mac. It’s amazing! (Applause)
But we haven’t been doing a good enough job here. As an example, there is something like 10 to 15 percent of Mac sales which can be traced directly back to people using Adobe Photoshop as their power app, right. When was the last time you saw Apple and Adobe co-marketing Photoshop? When was the last time we went to Adobe and said, “How do we make a computer that’ll run Photoshop faster?”
These things haven’t been as cohesive as they should have been, and I think we’re going to start proactively focusing much more on how we do these things.
(Extended applause)
The announcement of the Microsoft partnership is more familiar, and starts at 26:12:
Now, I’d like to talk about to talk about meaningful partners.
Apple lives in an ecosystem and (drinks water) it needs help from other partners, it needs to help other partners.
And relationships that, uhm, that are destructive don’t help anybody in this industry as it is today, so, during the last several weeks, we have looked at some of the relationships, and uh, one has stood out as a relationship that, uh, hasn’t been going so well but had the potential, I think, to be great for both companies, and I’d like to announce one of our first partnerships today, a very very meaningful one, and that is one with Microsoft (audience boos and claps simultaneously).
I’d like to take you through this.
Uhm, the discussions actually began because there were some uh, patent disputes (crowd laughs). And, uh, rather than, I know, rather than repeating history, I’m extremely proud of both companies that they have resolved these differences in a very very professional way. And this has led, I think, to an overall relationship that we’re announcing today that’s got several parts to it and we’re extremely excited about.
First part of it is a patent settlement and cross-license. The two companies have reached a full cross-license for all patents that exist and for patents that are filed in the next five years. And, uh, it has been a very serious patent settlement.
The second part of this is Microsoft is committing to release Microsoft Office on Macintosh for the next five years (audience claps). They are going to release the same number of major releases as they release on Windows during that time. They’re first release uh, uh, they’re going to target to have it out near the end of the year, it might slip a few months into next year, but they’re working real hard on it and it looks very very good.
Next, we have taken a look at browsers out there, and Apple has decided (slide switches to Internet Explorer, and crowd immediately boos) Apple has decided to make Internet Explorer its default browser on the Macintosh (booing, clearly audible “Nos”). Since we believe in choice (laughter), since we believe in choice we’re going to be shipping other Internet browsers as well on the Macintosh and the user can of course change their default should they choose to (cheering), but uh, we believe that Internet Explorer is a really good browser (jeering) and we think it’s going to make a fine default browser.
Java. We are going to be collaborating with Microsoft on Java, uh, to ensure we can get the best from each other and ensure that, uh, there’s compatibility between our virtual machines, and uh, we think that, uh, that will serve everybody’s interests.
And lastly, Microsoft is making an investment in Apple. Microsoft is buying $150 million worth of Apple stock (booing) at market price. It is non-voting shares (cheering) and they’ve agreed not to sell them for at least three years.
So what this means is, is that Microsoft is going to be part of the game with us as we restore this company back to health, have a vested interest in that stock price going up. We’re going to be working together on Microsoft Office, on Internet Explorer, on Java, and I think that, uh, it’s going to lead to a very healthy relationship. So, it’s a package announcement today. We’re very very happy about it, we’re very very excited about it, and uh, I happen to have a special guest with me today, uh, via Satellite downlink, and uh, if we could get him up on the stage right now (jeering).
Bill Gates then appeared, to laughter, jeering, and applause:
Good morning (jeering, laughter, applause)
Some of the most exciting work that I’ve done in my career has been the work that I’ve with Steve on the Macintosh. Uh, whether it’s the first introduction or doing products like Mac Excel, uh, these have been major milestones. And it’s very exciting to renew our commitment, uh, to the Macintosh. We have over 8 million customers using Microsoft software on the Macintosh. Uhm, we make it very easy for people to use Macintosh, uh, to take their, uh, their documents and work with all kinds of machines.
Uh, we’re very excited about the new release we’re building. This is called Mac Office 98. We do expect to get it out by the end of this year. And we’ve got some, uh, real exciting features, uh, it’s a product that’s going to require no setup, it’s gonna be an easy transition from people in the past, uh, I think it’s going to really, uh, set a new bench mark for doing a good job with performance and exploiting unique Mac features. Uh, in many ways its more advanced than what we’ve done on the Windows platform (applause).
We’re also excited about Internet Explorer and we’ve got a very dedicated team that’s down in California that works on that product and, uh, the code is really specially developed for the Macintosh. It’s not just a port of what we’ve done in the Windows environment (cheering). And, so we’re pleased to be supporting Apple. We think Apple makes a huge contribution to the computer industry. We think it’s going to be a lot of fun helping out and we look forward to the feedback from all of you as we move forward doing more Macintosh software.
Thanks.
(Applause)
Jobs again, with one of his more famous keynote speeches:
Thank you Bill.
You know, where we are right now, is, we’re shepherding some of the greatest assets in the computer industry. And, if we want to move forward and see Apple healthy and prospering again, we have to let go of a few things here.
We have to let go of this notion that for Apple to win Microsoft has to lose. OK? (Applause). We have to embrace a notion that for Apple to win Apple has to do a really good job, and if others (applause), and if others are going to help us, that’s great, cause we need all the help we can get. And if we screw up and we don’t do a good job, it’s not somebody else’s fault. It’s our fault. So, I think that’s a very important perspective.
I think, if we want Microsoft Office on the Mac, we better treat the company that puts it out with a little bit of gratitude. We like their software. (clapping)
So, the era of setting this up as a competition between Apple and Microsoft is over as far as I’m concerned. This is about getting healthy, and this is about Apple being able to make incredibly great contributions to the industry, to get healthy and prosper again.
(Applause)
The last perspective I’d like to leave with you on this is, you know, sometimes points-of-view can really make you look at things differently, when you hear a new point-of-view. Like for me, when I was looking at the statistics and it, it, uh, hit me that Apple is the largest educational company in the world, that was like a bolt of lightening. That’s huge! What an incredible base to build off of!
Another bolt of lightening is that Apple plus Microsoft equals 100% of the desktop computer market. (Cheering) And so, whatever Apple and Microsoft agree to do, it’s a standard, and uh, I think you’ll be seeing us work with Microsoft more, because they’re the only other player in the desktop industry. And I think you’ll be seeing Microsoft wanting to work with Apple more because Apple is the only other player in the desktop industry.
So I hope we have even more cooperation in the future because the industry wants it.
Jobe then foreshadowed the Think Different campaign,1 and that was a wrap. Like I said, bizarre by today’s standards, but historically important: I believe the aftereffects reverberate today.
Part 3 of my series on building sustainable apps in the app store comes tomorrow Monday.
Note: All transcriptions were done using Draft. It’s an amazing tool that makes doing stuff like this a cinch. Highly recommended.
This is a three-part series on enabling sustainable businesses on the app store.
Lastly, I just want to talk a little about Apple and the brand, and uh, what it means I think, to a lot of us. You know, I think you always had to be a little different to buy an Apple computer. When we shipped the Apple II you had to think differently about computers. Computers were these things you saw in movies. They occupied giant rooms, uh, they weren’t these things you had on your desktop. You had to think differently because there wasn’t any software at the beginning.
You had to think differently when a first computer arrived at a school where there had never been one before. It was an Apple II.
I think you had to think really differently when you bought a Mac. It was a totally different computer. It worked in a totally different way. Used a totally different part of your brain and opened up the computer world for a lot of people who thought differently. You were buying a computer with an installed base of 1. You had to think differently to do that.
And I think you still have to think differently to buy a Mac differently. And I think that the people that do buy them think differently. And they are the creative spirits in this world. They are the people that are not just out to get a job done but they are out to change the world. And they’re out to change the world using whatever great tools they can get. And we make tools for those kinds of people.
So hopefully, what you’ve seen here today are some beginning steps that give you some confidence that we too are going to think differently and serve the people that have been buying our products since the beginning.
Because a lot of times people think they’re crazy, but in that craziness we see genius, and those are the people we’re making tools for.
This series of posts is about enabling sustainable businesses on the App Store. In Part 1, I discuss why Paper and other productivity apps may not be doing as well as you might think. Part 2 explores why casual games, in contrast, are a sustainable business, but not a differentiator for platforms (I added a follow-up here). Part 3 analyzes why Apple in particular seems hesitant to enable sustainable businesses on the app store.
Before I get to Part 3, I wanted to clarify a few points in Part 2
This is our new Ipad 4. Right now, we’re just learning the basics of it, but one day I hope to be fluent in all of the Apple lingo that everyone else seems to know by heart (like what the heck the iCloud is, for example). Up until this point, we’ve been using Apple’s competitors almost exclusively (Android, Palm’s Web OS, etc), so we have a little bit of a learning curve here.
All we know right now is how to get it connected to the Wifi and how to launch Letterpress. Yes, Letterpress factored into our decision to purchase an Apple product.
It’s a fair rebuttal as far as anecdotes go, but I think Letterpress is the exception that proves the rule. Check out this graph from AppAnnie:
Letterpress’s grossing ranks – Credit AppAnnie
I’m sure LetterPress has inspired many more people than Matthew’s relative to buy iOS devices, but LetterPress – which has only one in-app purchase – is clearly not a sustainable business. There is no way to earn additional money from existing users.
This is power of repeat purchases by existing customers.
Loren Brichter and Letterpress fit the popular idea of what casual game development is like: brilliant developer creates a new concept, releases it to the world, and gets rich. It’s certainly the image that Apple prefers to cultivate.
The truth is a little more complicated. Most casual game development is done by studios like King, and it’s all about playing the odds. Multiple games are developed, heavily analyzed and tested, with constant tweaking to the monetization forumulas. In this world of playing the odds, building for Android as well as iOS is an obvious choice – if a game breaks out, like Candy Crush Saga, you want the maximum audience possible, especially since casual games monetize on Android as well.
That is why, of the top 25 grossing apps on iOS,1 20 of them are also on Android (and two of them, Zoosk and MLB, aren’t casual games). The business model of casual gaming inevitably pushes publishers to be multi-platform, which is why they are not a platform differentiator.
Part 3 will focus on the types of apps that do differentiate platforms, what sort of business models might work for them, and why Apple may be reluctant to help.
This is a three-part series on enabling sustainable businesses on the app store.
This series of posts is about enabling sustainable businesses on the App Store. In Part 1, I discuss why Paper and other productivity apps may not be doing as well as you might think. Part 2 explores why casual games, in contrast, are a sustainable business, but not a differentiator for platforms (I added a follow-up here). Part 3 analyzes why Apple in particular seems hesitant to enable sustainable businesses on the app store.
The opportunity is there for mobile game makers who can strike the right cord with their audience. Mobile game sales are expected to ring in at more than $9.9 billion this year, up 13.5% from the $8.8 billion spent in 2012, according to market researcher PwC…
The company’s leading game, “Candy Crush Saga,” was launched on Facebook in April 2012. It is the most popular app on Facebook, with an estimated 15.4 million average daily users as of the most recent figures, according to AppData, an independent firm that tracks online activity.
“Candy Crush Saga” has also been one of the most frequently downloaded free apps via the iPhone and Google Play, according to App Annie, which tracks app store purchases. It is also among the highest grossing apps on iPhone and Google Play when users’ in-game purchases are considered, App Annie figures show.
Stories like this, along with the $10 billion dollars Apple has paid to developers, would seem to be the obvious counterpoint to my app store pessimism.
Tim Cook announcing that Apple has paid $10 billion to app developers (credit The Verge)
$10 billion is the single most important number supporting Apple's app moat.
But the more I think about it, the more I’m not so sure.
It’s games like Candy Crush Saga – free, with in-app purchase – that are fueling much of that $10 billion. According to App Annie1, for the iPhone:
95 out of the top 100 grossing apps feature in-app purchase
79 out of the top 100 grossing apps are free to download
The numbers are broadly similar on Android, with an even sharper skewing towards free: 96 out of 100 of the top 100 grossing apps are free to download.
There are some important implications here for both Apple and app developers:
New monetization options can enable sustainable businesses built on the app store
Apple allowed in-app purchases in free-apps in October, 2009. You can draw a direct line from that policy change to King’s IPO. For those who love apps, this is great news: it is possible to build a sustainable business on the app store, if the right policies and mechanisms are in place.
In the case of in-app purchase, a monetization mechanism built directly into gameplay is a powerful driver of purchase, allowing developers to make money from their existing customers. That is the key to a sustainable business.
Only games can build a business on in-app purchases
Unfortunately, building a sustainable business on in-app purchases requires an infinitely available good. For example, in Candy Crush Saga, if you die five times on a level, you can’t try again for 30 minutes. Unless, of course, you’d like to buy 5 more lives for $0.99. Providing those five lives entails nothing more than resetting a counter.
This doesn’t work for non-games. Look back at Paper: building the Mixer was a massive engineering challenge, yet they only charged $1.99 once.
Casual games do not differentiate app platforms
Candy Crush Saga was originally a web game, then a Facebook game, and was later ported to both the App Store and Google Play (it’s the top grossing app on both). In fact, cross-platform play is one of its selling points:
King.com kept the game near identical across all platforms, with a similar map screen, leaderboard, UI and more as well as letting the player carry their game progress across all platforms.
“It’s a great customer experience,” says Dave Rohrl, vice president of game production at Goko. “You can experience the game when, where and how you want. This lets players interact with your game a lot more, which ultimately increases their engagement and monetization.”
That’s great for King – more potential customers, and more opportunities for monetization – but it’s not something Apple (or Google) should feel particularly special about.
Unlike the PC wars, I don’t think casual games will prove to be much of a differentiator between the various platforms for a few reasons:
Games take over the whole screen; this means that tailoring a game to fit a particular platform’s look and feel isn’t important
There is an entire industry devoted to providing cross-platform compatibility from day one. Most game developers are targeting game engines such as Unity, not iOS or Android. This is acceptable because of point one
Games are much more likely to be faddish; how many of you are playing the same games you were three months ago, much less three years ago?
Net: no one is buying (or not buying) an iPhone or Android device because of Candy Crush Saga, or any other casual game.
Thus, from a strategic perspective, that $10 billion is not nearly as impressive as it looks, especially since in-app purchase has unlocked revenue for Google Play developers as well. Any discussion of Apple’s app moat should first discount the entire casual game genre.
This is a three-part series on enabling sustainable businesses on the app store.
This series of posts is about enabling sustainable businesses on the App Store. In Part 1, I discuss why Paper and other productivity apps may not be doing as well as you might think. Part 2 explores why casual games, in contrast, are a sustainable business, but not a differentiator for platforms (I added a follow-up here). Part 3 analyzes why Apple in particular seems hesitant to enable sustainable businesses on the app store.
I drew this to illustrate the first Stratechery post
Admittedly, compared to some of the stuff Made with Paper, my sailboats are nothing special. But for me, it was honestly a feeling I really didn’t anticipate: I drew something, and it didn’t suck!
Paper is a transformative, device-defining app, and has been awarded accordingly bybothAppleandthedesignindustry. According to App Annie, as of June 21, Paper ranked 7th in the Productivity category according to downloads (119th overall after a recent jump), and 4th in revenue (108th overall).
By every visible measure, FiftyThree, the makers of Paper, are the definition of an app store success story, and this week they closed a Series A round of financing led by Andreessen Horowitz.
It’s easy to see this as a big endorsement of the App Store: startup creates a breakthrough product, gets noticed, gets funding, changes the world. And perhaps that’s the path FiftyThree is on.
But there’s another scenario that may be in play, and if I were Apple, this round of funding and FiftyThree’s plans going forward should be a yellow flag that the App Store may not be as strong as it could be.
Some pertinent facts about this round of funding and the circumstances leading up to it that deserve a closer look:
As recently as January, FiftyThree had the same five employees they started with. In the intervening five months, they have quadrupled the size of their team.
The positive spin is that business is good, ideas are large, and amazing products are on the horizon. The more pessimistic view is that FiftyThree has decided they need to “Go Big or Go Home”. In other words, while they were an App Store success story, the revenue they generated wasn’t sufficient to support five employees, so they’ve decided to take their shot at massively increasing revenue.
Last October, Paper added the Mixer for a $1.99 in-app purchase. This was the first new additional item for sale beyond the original pencil, marker, pen and paintbrush (available for $1.99 each or $6.99 for the set).
Then, this May, Paper gained the ability to zoom in a really unique way. It was a major feature request, yet surprisingly, it was completely free. No in-app purchase required. Perhaps FiftyThree just loves their customers. Or perhaps this is the sign of a new business model.
The positive spin is that these are really interesting areas to take a creation app; imagine the possibilities!
But the truth is I really struggled to find the positive spin; collaboration and hardware, while interesting, seem counter to the original Paper vision:
It seems to me that Paper was originally about inspiration and ideas easily and simply created, not collaboration and finicky hardware. But, and I think this is the crucial point, collaboration and hardware have obvious paths to sustainable monetization.
Collaboration could require a subscription service that will provide revenue over time
Hardware can be sold for much higher prices than $1.99 (The Pogo Connect, which Paper supports, sells for $79.95 plus accessories).
This is what I think happened to FiftyThree and Paper:
The FiftyThree Timeline. Months mark the founding, Paper releases and updates, and fundraising.
With a small amount of seed funding, the original five employees set out to build Paper, the best place to capture your ideas. After launching a year later, they began to reap the rewards through in-app purchases. They kept improving the app, and came out with a significant update in October – the Mixer – for $1.99.
And then they realized that they were five people living in New York City without an obvious route to sustainable revenue.
The problem for Paper is the same for all productivity apps in the App Store: there is no way to monetize your existing users. Look at me:
The revenue FiftyThree has made from me (after Apple’s 30%) versus the value they have created.
My use of Paper is an essential part of stratechery, yet I needed to only pay $8.99 for two in-app purchases, for which I never need to pay again. That’s a hell of a bargain, but it’s ultimately unsustainable.
Productivity apps require regular maintenance and upgrades
Unfortunately, app store economics don’t really work here.
If you have a low price, you need massive volume to make up for the upfront costs
If you have a high price, users are much less likely to buy your app, especially since there is likely a learning curve
If you can’t monetize over time, your users are extracting MUCH more value than you are receiving in revenue. That’s great if you’re a user, up until the company you love sells out because they can’t make money. Sparrow is the canonical example here. How many Sparrow devotees would gladly pay $5 a month to have the app available and continually updated?
Trials do ameliorate the pain a little, particularly if you pursue the high price option, but they don’t address the time mismatch: as a productivity app becomes more valuable, the developer doesn’t get a dime of more revenue.
There is so much more Apple (and the other platform owners) could be doing to improve this situation; paid updates and app-store supported subscriptions (beyond Newsstand) would be great places to start.
Moreover, it’s something Apple should be investing in. The App Store remains the largest moat around iOS; apps like Paper simply don’t exist on Android. Perhaps FiftyThree planned to go in this direction all along, and if so, good for them. But if they originally wanted to make a living on the App Store, and can’t, then their future probably includes more platforms than just iOS (a loss for Apple) and a chance of outright failure (a terrible loss indeed).
Of course, there were no significant changes to monetization options in iOS 7; the team was too busy. But were they busy on the most essential things?
This is a three-part series on enabling sustainable businesses on the app store.
Apple’s TV hobby just got a bit bigger: Apple has added five new content providers to its sort-of set-top box, notably Time Warner’s HBO Go and Disney’s WatchESPN. Also available as of today: Satellite TV service Sky News, anime subscription service Crunchyroll, and concert subscription service Qello.
Apple TV owners who have access to HBO and/or ESPN have already been able to stream video from those companies’ apps to their sets, via AirPlay. But direct access via a dedicated app should be a plus.
This is absolutely consistent with my prediction for how Apple will approach TV: work within the current model (access to these new “apps” requires a cable subscription), even as they work to steal attention from traditional programming.
In other words, while I got the timing wrong, I still think my prediction of an Apple TV SDK is correct. In fact, the addition of controller support in iOS 7 is an obvious first step.1 In retrospect it’s obvious why it didn’t happen this time around: iOS folks were busy.
More on iOS 7’s hidden costs soon.
It’s also possible that I’m overfitting the evidence here ↩
I’d like to propose a new term in the business strategy lexicon: a strategy credit. It’s basically the opposite of a strategy tax. As I wrote a few weeks ago:
A strategy tax is anything that makes a product less likely to succeed, yet is included to further larger corporate goals
An obvious example is last week’s release of Office for iPhone, but not iPad. I don’t have any visibility into the thinking here, but clearly it’s best for Office to be on as many platforms as possible, but better for Windows that Office only be available on Windows 8.
Apple has always placed a priority on protecting our customers’ personal data, and we don’t collect or maintain a mountain of personal details about our customers in the first place. There are certain categories of information which we do not provide to law enforcement or any other group because we choose not to retain it.
For example, conversations which take place over iMessage and FaceTime are protected by end-to-end encryption so no one but the sender and receiver can see or read them. Apple cannot decrypt that data. Similarly, we do not store data related to customers’ location, Map searches or Siri requests in any identifiable form.
You can almost hear it now:
How admirable! Golly gee, Apple is such a better company than those hypocritical evil-doers at Google! Why can’t everyone treat customers so well? Apple good. Google bad. Facebook worse.
The truth is this is nothing more than a strategy credit:
Strategy Credit:An uncomplicated decision that makes a company look good relative to other companies who face much more significant trade-offs. For example, Android being open source
User information of this type isn’t important to Apple’s business model, so they “choose not to retain it.”1 There’s nothing worth praising here – or denigrating – but it’s worth acknowledging.2
In the meantime, though, Apple will happily score rhetorical points in the court of public opinion for a decision that wasn’t difficult at all.
They do, however, happily retain all of your credit card information, to choose one example ↩
Before you say that all companies should have Apple’s business model, I suggest reading Free by Dr. Drang ↩
“I felt like a dope,” says Jobs, thinking back to summer 2000, when his fixation on perfecting video editing on the Mac distracted him from noticing that millions of kids were using computers and CD burners to make audio CDs and to download digital songs called MP3s from illegal online services like Napster. Yes, even Jobs, the technological visionary of his generation, occasionally gets caught looking in the wrong direction. “I thought we had missed it. We had to work hard to catch up.”
Eight months later came the launch of the iPod.
In October 2012, Jony Ive replaced Scott Forstall. In 7 months, 1 week, and 5 days iOS has undergone a seismic shift:
iOS 7 preview page on left (link); iOS 6 preview page on right (link)
The question we should be asking is what this shift, and the urgency with which it was executed, portends.1
