iOS Stuff

30% of everything is ours

As I started writing this, I was listening to John Siracusa talk about his article on Ars Technica a week or so back. In essence he compares Apple’s current situation to that of Microsoft in the 80s and 90s. In a nutshell, Apple now wants to be everywhere and is inflicting damage on actual and potential rivals because it has some kind of a real or imagined competing interest.

In Apple’s case, I believe its strategy to expand into new markets has upset this balance. Apple rents and sells movies and TV shows, so it’s in competition with Netflix. Apple is in the music business, so it competes with Rhapsody. Apple wanted to be in the ebook business, so now it competes with Amazon. Apple sells an email, file storage, data syncing, and web hosting subscription service, so it competes with Google, Dropbox, Tumblr, and dozens of others. All of these companies have iOS applications and contribute in some way to the success of Apple’s platform.

And:

This tension between being a platform owner and also trying to build new businesses on that very same platform is another thing that Apple shares with Microsoft. But Microsoft is also a perfect example of how this strategy can seemingly succeed (Windows won the war for the desktop and Microsoft’s applications came to dominate the Windows platform) while blinding a company to the long-term failure scenario (a lack of competition allowed Microsoft’s products to stagnate, and the next round of innovations happened someplace other than the Windows platform).

He argues there are two likely outcomes, and neither is good: if Apple isn’t careful, it will hurt its platform and lose big to Android. If Apple is careful, it will end up killing its competitors and become fat and happy like Microsoft.

A Simple, Smooth Business Model

The question is whether it’s anticompetitive and ultimately self-destructive for Apple to “tax” real or potential competitors to its various “side businesses” (iBooks, say), and whether Apple is mistakenly or even unconsciously protecting broken business models and ultimately damaging its own platform(s).

Apple is trying to build a simple business where it sells iOS devices at a profit and it sells stuff for iOS devices at a 30% margin. It wants buying stuff for iOS devices to be easy and safe. The rules are:

  • The stuff you want to buy is in one place.
  • Buying it is easy.
  • It won’t eat your face.
  • It’s not available for less elsewhere.

I think that’s pretty clear for both providers of stuff and consumers of stuff.

In the end, all of the complicated arguments come down to two questions:

  • Should Apple allow rivals to sell stuff on iOS?
  • Is collecting X% (e.g. 30%) on some stuff (e.g. Apps) anti-competitive in ways that collecting X% on other stuff (e.g. subscriptions) isn’t?

The answer to the first is clearly no, as this would be stupid. Let’s say Apple allows Amazon’s App to let users buy Amazon stuff for the Amazon App. All four rules are instantly violated. We need to comparison shop. Who knows if Amazon’s stuff will eat our faces? Etc. So, no that’s a dumb idea.

The answer to the second is also clearly no. Why should it be OK for apps to be charged at 30% and not books? In fact it’s pretty clear that, when dealing with digital goods and DRM, if you charge something for one you need to charge it for all, or next thing you know you’ll need to buy a specific music subscription for your word processor to work because there’s a margin loophole there.

In his podcast John Siracusa makes the argument that Apple has a huge conflict of interest in, for example, selling Netflix on the idea of shipping an iOS app because over in the next room someone else is trying to sell video content through iTunes. Thus the iTunes business is in conflict with the platform business. While this is true, I’d argue that conflicts are inevitable unless you build platforms as a public service, and that the same argument works — and works better — in reverse.

If Apple lets Netflix collect 100% of video rental revenue through one-click in-app purchasing, now every time someone gets Netflix on an iOS device it’s a net loss for Apple. (Would Netflix prefer to pay Apple 10% but know that Apple will always have a huge incentive to make Netflix look bad in comparison to iTunes?) But if Apple gets 30% either way then it’s a wash — let the market decide. It may be tough for Netflix that it has had to replicate a huge amount of infrastructure on the one hand and business relationships on the other hand to get 70% of a movie rental through Apple when Apple gets 30% as “tax”, but at least Apple doesn’t have a vested interest in killing Netflix in the long term.

(And it gets worse. Apple would also need to decide what kind of stuff is 30% stuff and what kind of stuff is 0% stuff, or whatever. The fewer decision points Apple inserts itself in the better for everyone. Do we really want developers whining in public about how Apple won’t allow their game content subscriptions to be sold as “movies” at a lower margin because it’s “mainly cut scenes” and not gameplay? Right now the App Store approval process is bad enough.)

Indeed, because Microsoft got no actual direct benefit from the success of third party software on its platforms, it consistently did much nastier things to competitors. But that’s another post.

Is 30% too high? That’s a question for the market to determine. But remember that Amazon built its eBook business collecting a bigger toll from publishers than 30%, and Music Publishers certainly didn’t pay artists 70% of anything ever. And it’s always easier to cut taxes.

Post Script: Horace Dediu (asymco.com) argues that the “strategy tax” is simply opportunity cost. You pick a strategy and pay the cost of picking that strategy versus any other strategy. He further argues that Microsoft’s strategy was “platform lock-in” and suggests that Apple’s might be “the product”.

I don’t think this view is incompatible with mine, which is more of a tactical discussion (given that Apple want’s the iOS product to be as good as possible, this implies the four rules I list).