Apple Doesn't Care Whether Your iPhone App Makes Money

May 14, 2010

About a month ago I wrote an article about Apple and iPhone apps, claiming that since the iPhone and iPhone apps are complementary products, Apple has an incentive to keep apps cheap in order to sell more phones. A lot of people thought I was wrong both here and on Hacker News. So in an effort to redeem what was perhaps a poorly-written thesis, I present this update based on the discussions that followed.

I maintain that Apple is primarily a hardware company making high margins on each device it sells. Apple is happy to keep doing this, since it’s very very good at it. But being the intelligent marketers that they are, Apple’s execs know that people like to buy devices that can do loads of cool stuff. Enter iPhone apps and the App Store.

Since Apple isn’t really a software company it must entice others to create applications for its devices. So far it has wildly succeeded in achieving this with the iPhone (and iPod Touch), boasting over 200,000 apps available in the App Store. But quantity of apps isn’t the only metric that matters. Price is also important. If all of those 200,000 apps cost $99, the App Store would be almost useless as a marketing tool since few could afford to buy many apps.

So Apple clearly has an incentive to create a commoditized app marketplace, where good apps are plentiful and cheap. But this is exactly the situation that “Strategy Letter V” predicts for a product and its complements. And based on information like this, it’s hard to deny that the App Store isn’t already a commoditized marketplace. Most apps are free or cost 99 cents regardless of quality or development cost.

Hence we see, at best, that Apple really doesn’t care whether or not your iPhone app makes any money. As long as it is good and inexpensive, Apple is happy to sell it for you since they reap most of the rewards. (Granted Apple takes 30% from each app sale, but they’ve stated that the fees cover the overhead of running the App Store and are not a significant source of profits). But as an app developer, your incentives and Apple’s are not at all aligned.

Now don’t get me wrong, Apple has every right to pursue what’s best for itself according to its incentives. But let’s not hold any illusions that Apple has developers’ best interests at heart.

P.S.

Interestingly “Strategy Letter V” also sheds light on the developer outrage surrounding Apple’s change to Article 3.3.1 in the iPhone Developer Program License Agreement. Just as Apple has an incentive to commoditize iPhone OS software, software developers have an incentive to commoditize devices. How would they do that? By creating a software abstraction layer that makes every device look the same to the applications above. And these kinds of abstraction layers are exactly what the 3.3.1 change is designed to snuff out. It’s an interesting battle with plenty of money to be made and lost on both sides.

blog comments powered by Disqus