January 26, 2012 · 0 Comments
Try as I might to find objective data in their financials to show the slowing of the platform, I found it difficult to observe any cracks in the iOS money-making machine.
Apple is continuing to spend fewer dollars as a percentage of revenue on both marketing and engineering (the easy way to tell at a macro level that an at-scale tech franchise is sucking wind), and their integrated approach continues to win the hearts and minds of the US consumer thus keeping legions of developers working first on iOS and later on Android.
Still, it cannot be a healthy thing that the bulk of the economics are going to Apple, and not just two-thirds of the profits in the handset market but most of the ecosystem rents in the app ecosystem, music business, smartphone carrier business and whatever other industry segments they chose to enter. The fact that this may in several cases be a direct wealth transfer from X industry to gross margin dollars on iOS devices that have the same components as their Android cousins (and are in some cases made on the same lines) does not make it less healthy.
This simply cannot last. And this mind-blowing chart from Asymco tells the story of why.
It is astounding to see how quickly the smartphone has dominated all other individual computing platforms. While there are obvious reasons (truly portable computers that are always with you, ubiquitous access to the Internet, carrier subsidies), the key point is that on top of being far bigger, far faster, the forces at play in mobile (economic, technical and social) make it the single most dynamic multi-billion dollar industry in the world. Yesterday’s king is today’s pauper with just the smallest series of missteps.
Since those steps can’t be observed from macro metrics, I thought it might be interesting to paint a picture of why the incremental developer on the platform might be losing steam with the promise of becoming an “AppStore Rock Star.” After all, if Microsoft has taught the world anything over the last decade, it is that losing the hearts and minds of developers can seriously arrest the momentum of any platform, network effects be damned. While there are plenty of iOS developer surveys out there, they are hard to parse for perceived changes of momentum (though not for sampling bias in most cases) so instead, I’ll focus on three reasons why we might be on the cusp of a change in the tide here:
First, while there are more iOS developers building better looking apps and standing a better chance of making money from the AppStore than other smartphone marketplaces, the reality is that app prices continue to plummet making it increasingly hard for the small team/solo cottage industry that gave us some of the AppStore’s early hits to continue making a living (to say nothing of the increasing complaints I hear from developers about the opaqueness of the approval/update process). Put another way, there is now much more money going through the AppStore than is being generated because of the AppStore.
Here is a crude example in just one of many of the “through” verticals: last year Apple paid roughly $2.5-3 billion to all AppStore developers worldwide. At the same time if we take a 1% estimate of e-commerce sales that went through apps in the AppStore (haircutting the mobile 10% of ~$680 worldwide 2011 e-commerce sales by 20% for iOS and a further 50% for non mobile web) is still around $7B which at 30% gross margins is right around current developer revenue. And this is just one of the many verticals that monetizes well through the AppStore whereas the $2.5B includes games (a huge part of revenues) and in-app payments for content. Not only are the economics of app purchase not compelling (and heading in the wrong direction), but the broader platform point is that none of this money exists because of something unique to the iOS ecosystem. It could just as easily move to Android despite the latter’s lower “because of” current monetization ability through the sheer power of market share.
While Apple has done a brilliant job of defending its own ecosystem through the half million bits of effort (apps) from independent developers, it has not, unlike the Microsoft of the 1990s, managed to create a thriving ISV community dependent on iOS for revenue in the way that Windows developers made their livelihood— and in some cases very large companies— on the back of Win32. Where is the Lotus of the AppStore? Thus far, Rovio (Angry Birds) comes the closest, and even they have quickly diversified to a plethora of platforms despite being in the lucrative gaming app vertical.
Second, while there is no question in my mind that the iOS toolchain is far superior to the kludge that is Android’s (which is now also encumbered by increasing fragmentation (both vendor and version wise) and Uncle Oracle’s ownership of the underlying language), fancy development environments and better UI toolkits don’t keep developers around for the long term (see again: 1990s Win32 development), but platform ubiquity does— especially in a making money “through” era where virality is your new marketing, and more than 1/2 the market is only accessible on either Android or the mobile web. Think of viral loops and how quickly they can die when 50% of the invites fail to land on an iOS device.
Finally, there is the straight jacket that is the controlled experience of iOS, most commonly felt today in the way Apple implemented background processing on its platform. The arguments for this poor man’s multi-tasking have been battery and CPU constraints but as both have improved (with the iPhone 4 and 4S) they appear less relevant. In the meanwhile interesting apps need better control over what can happen in the background (think of what comes after the “check in” for location-based social networks or almost all communications apps now being funneled through the unintuitive Notification Center). The iOS devices are now at the point where they are quite powerful computers— and the most relevant computers in people’s lives— so continuing to maintain a small sandbox for third parties to exploit the possibilities will only increasingly make alternative platforms attractive. Put in a much geekier way: the smartphone is today’s tricorder and in order for developers to make it that, the first place they need more control is in what happens in the background. Android gets you that today and Apple would be wise to follow.
One final point related to why developer momentum may lag in the coming years: in 2007 when Steve Jobs launched the original iPhone, he claimed that it was “five years ahead of the rest of the market,” which, as it turns out, seems to have been remarkably accurate. The market has now caught up though, and outside of incremental upgrades (higher density display, faster multicore processors, etc.), Apple has given us only two “next generation” pieces of functionality: iCloud which, while promising, is far from ready for prime time; and Siri, a fundamentally transformative interface step forward— something which Apple itself is quite good at— but works far too poorly to become mainstream today. In both cases, a robust API for third parties could enable the hundreds of thousands of independent developers who got the iPhone where it is today to help iOS continue to cement its leadership position. It would be messy, and there would be ugly moments, and it would quite likely be an un-Apple move to make. Without it though, the platform may have nowhere to go but down from here.
[Ed note: before people start pointing out how much money Apple is making and how successful it is— I agree. I am looking for signs that this may end here and to that end, this is a speculative piece]