The walled garden of iOS is not something new but developments between Microsoft and Apple brought the massive 30% cut that Apple takes from every transaction back into the spotlight. Apple takes not only 30% of every app sold but also any transaction done within the app. Let’s say you bought a game for $0.99. In that game, you bought downloadable content (e.g. new levels) for $1.99. You paid a total of $2.98. Apple will take a cut of 30% of everything, meaning it scoops $0.89 leaving the developer with just 70% of the earnings ($2.09). It’s a huge cut but not very different from Google and Amazon who also take 30%. Microsoft takes a range of 20%-30% basically because it sells more than just mobile apps. Desktop app makers will face lower cuts but 20% is still considerably huge.
These cuts are not pure greed. I’m sure a huge portion is simply rent seeking but an app store also provides a marketing platform and a ready made audience. It also provides distribution, support and payment services without the developer needing to handle all that on his own. 30% is the industry standard but why has Apple taken flak again?
Apple’s app store draws a line so that any payment done within the app will be subjected to the 30% cut. How some developers have got around it is to not offer payments within the app. Instead, whenever payments must be done, a browser is launched and you go directly to the website to make the transaction. Apple cannot take its 30% for web transactions done in Safari via websites. Amazon has done that for its Kindle e-book sales and now Microsoft is attempting to do the same.
The SkyDrive App: Microsoft vs. Apple
Microsoft’s app in question is SkyDrive, the software giant’s answer to other cloud storage solutions such as DropBox and Google Drive. SkyDrive started out as free with no paid plans. It got onto the iOS app store without a hitch. Free and nothing in cash for both Microsoft and Apple. Then, Microsoft rolled out paid plans that offered more storage space. It didn’t want Apple to take a 30% cut of these paid plans since such payments are done monthly and the user doesn’t necessarily only use iOS devices for SkyDrive. So, it decided to do what others have done. Do not allow in app transactions and if you want to purchase a paid plan, you are sent to the Microsoft website where Apple cannot take its 30% cut. It was within the rules but Apple decided to change its usual stance telling Microsoft it would not approve the SkyDrive app if payments were not made in app.
It looks bad on Apple. It stinks of greed and double standards. Some attribute this as a different policy specific to Microsoft because Apple knew that Microsoft would launch Office on iOS in the coming year. If it can push such draconian laws on Microsoft, Apple would profit even more handsomely when Microsoft Office was launched with paid plans for Office 365.
But Apple is not doing this out of pure greed. It needs to do this for survival. You may laugh about the term ‘survival’ considering that Apple is the company that holds the largest amount of cash in reserve. But things will not remain the same for Apple. Apple’s profits are almost completely hardware generated. It has moved massive numbers of iPhones and iPads. Numbers continue to rise but what is key is the rate. Rate of growth has been slowing and it is not surprising. This is hardware we are talking about.
The Hardware Problem
Apple is probably the best hardware maker out there. They do very little on software. iOS has not changed much since its first iteration. Ditto for the many versions of OS X over nearly a decade. Cupertino’s favourite firm needs to push new hardware every year in order to maintain growth or at least profit streams.
That was a problem with desktops and laptops. Nobody buys a new desktop/laptop every year. Most people upgrade their traditional computing devices every 3-4 years. For a hardware company like Apple, this is not good news. This changed when Apple moved into smaller and cheaper consumer electronics. First came the iPods and then the iPod Touch which spawned the iPhone. A few years later the iPad came into the picture. iPods no longer sell too well. Mainly because phones can do everything an iPod does and more. The iPhone gobbled up the iPod market. iPads are a different beast and were complementary products to the iPhone. The phone and tablet products thus make up most of Apple’s margins. But how long can these last? Only two ways exist. Getting new users to buy into your product line or getting current users to upgrade. The first is happening but the second is questionable.
Smartphones are devices that users upgrade every 1 or 2 years mainly due to how contracts with service providers are structured. iPads face a similar cycle but are slightly longer than phones. Apple thus have a revenue stream that is well stocked each year. However, things are changing because that’s the nature of how the hardware business is.
From the first generation iPhone to the iPhone 4, upgrading was a must. Improvements in hardware came in leaps and bounds. Post iPhone 4, the need to upgrade fell significantly. The iPhone 4S provided little improvements over the 4. The iPhone 5 was a bigger bump but still didn’t provide the same magnitude of improvements before the iPhone 4. People are not upgrading their iPhones as much as they were 2-3 years ago.
Many of my friends who are iPhone users are still on the 4. Very few went on to the 5. Most of the iPhones they have are their first iPhones. Those who are on their second iPhone came from the 1 to 3GS era. Walk on the streets and observe, the result is the same.
This is no fault of Apple. It is just how hardware is. The iPhone 4 marked the generation that iPhones finally became mature. The same can be said of Samsung’s Galaxy S2. What more can Apple do? Bigger screen probably but that’s about it. LTE is already on, NFC is not a game changer, wireless charging is a gimmick. What exactly can they do hardware wise that will bring immense interest to upgrade? Nothing really much.
We will come to a point in time where there’s no need to buy the latest tablet or the latest phone all the time.
What we see here is what desktops and laptops went through decades ago – the maturity of a new hardware segment. We will come to a point in time where there’s no need to buy the latest tablet or the latest phone all the time. I’m sure enthusiasts will continue buying the latest and the greatest but the mainstream crowd – the consumer portion that accounts for a gigantic share of the profits, will not be doing so. This is a serious problem for Apple and any hardware maker.
What Apple can be thankful for is that it has a fan base. Unlike any hardware company, only Apple and Samsung have massive numbers of followers. I do not like the idea of technological fan boys but these firms have had the clout to draw consumers who will upgrade because they love the brand. And in their show of affection, they are willing to hand their cash over on a yearly basis. HP, Dell, Acer, Lenovo and the rest can only dream of rabid fans like these. Yet, such a segment of the consumer market is not huge enough. Apple cannot rely on fans to keep its stream up.
So What Can Apple Do?
For all its years battling for survival, Apple has had more data points then required to understand that software is almost always a better business model. Microsoft’s profit margins and market share during their heydays were so massively huge that Apple and Google’s current profits and market share respectively do not compare to what Redmond was doing back in the day. What was Microsoft making? Software. What does it take to make additional copies of software? Nearly nothing. The same cannot be said of hardware. This was how Bill Gates breathed in thousands of dollars every second. With a marginal cost of close to zero the profit markups were insane.
Of course, times have changed. Software costing hundreds of dollars do not sell as well as they did in the past. But they still sell in way larger quantities than hardware. They are easier to manage, easier to distribute, cheaper to mass produce and easier to get users to buy. While the software market is almost certainly more lucrative than hardware, Apple’s position gives them nearly no way of entering the software market. It is never going to push iOS to other manufacturers or OS X to other OEMs. It will never do what Windows did. But there remains a lot that they can do.
Google has the most forward looking and scaleable business model of any tech company in the world.
Software is changing. It’s no longer the local programs that you have now. It’s about delivering software over the internet. That’s what the fancy term ‘cloud’ is used for. And that is exactly what Google’s business model is built on. Google has the most forward looking and scaleable business model of any tech company in the world. It is geared on embracing and pushing change. It’s manner of delivery allows minimal user effort to keep using the latest and greatest from the web giant. Google is all about web services. And this is what Apple has to get into.
I often laugh when I read so-called tech journalists claiming that Microsoft is trying to copy Apple. I’m sorry, that’s such a blind statement that you should reconsider the suitability of your job. Microsoft may have produced the Surface but it is not trying to be a hardware firm. Microsoft is trying to emulate Google and that’s because Google simply has the best model going forward. The Surface is to Nexus what Bing is to Google Search, Outlook is to Gmail, so.cl is to Google+, SkyDrive is to Google Drive, etc. Microsoft wants to get on the cloud so badly it is throwing everything and reshaping its company and all its products to embrace an online presence that streams software content. This is why Office is becoming a subscription based service that you can run online. This is also why Windows Blue is the next big thing for Windows.
Apple has to get its foot into web services. iCloud is fine but so severely limited that only people who completely live within Apple’s world will find useful. MobileMe, Ping and other web based services line a long list of Apple’s failed ventures into this up and coming segment of the market that is poised to take off exponentially. The problem with Apple’s web services is that they are handicapped by being made to promote propriety hardware.
The problem with Apple’s web services is that they are handicapped by being made to promote propriety hardware.
Apple tried to not depend on Google and that was how the iOS 6 maps debacle was born. Apple and Microsoft know that they cannot pin their futures on Google, yet Google has such a presence going forward that both companies must respond. Microsoft has begun its response in a huge way in 2012 but Apple is sitting on its hoards of cash seemingly doing nothing. Rumors say they are trying to produce their own microprocessors. While that could be handy, it is far from being a game changer.
What Apple has is content via its iTunes store. Apple can find a position where it is a mix between Amazon and Google. It has the strengths of both to bring together a set of web services that are compelling to mainstream users. Google is terrible at content and Apple already has millions of music, movies on its hands. It can rival Amazon and it must find a way to push forward with that. The iPhones, iPads, iPods and even the rumored upcoming iTV must not be its main cash generator. They must simply become screens from which even more profits are made. Apple’s 30% cut on its App Store is not going to get them too far. The App Store is saturated. Profit margins for developers are dipping and new comers into the App Store are dropping.
The future for Apple is services. Hardware cannot continue to be its primary business. It doesn’t mean they have to drop hardware. It simply means they have to start envisioning hardware as a conduit to a brilliant consumer friendly set of web services targeted at entertainment well integrated with necessities such as communication (email, iMessage, etc) and social sharing. Apple doesn’t have to copy Microsoft or Google. It needs to find its niche and there is a huge gap waiting to be exploited, that no one has filled.
Apple doesn’t have to copy Microsoft or Google. It needs to find its niche and there is a huge gap waiting to be exploited, that no one has filled.
Apple has sufficient ammo to exploit its unique position and carve out a web platform that will shake even the might of Google. It has to move fast. The hardware segments it is invested in are maturing and consumer interest will wane in the years to come.
It is said that you never want to ever see your peak. Apple is at is peak and that means downhill is all that is left. However, if they are to embrace the cloud, we could see Apple move into a new paradigm. App Store taxes are not going to cut it for long. It is critical for tiding things over but it is not a sustainable end game.