I think Apple has adopted an interesting market strategy.
It has been clear to me, since coverage of Apple partnership with News Corp. began, that Apple had shifted its emphasis from application sales to book/magazine sales in a way that is similar to the smooth evolution from music sales to encompass application sales that preceded it. But where there are similarities, there are also differences.
The recent news that Apple is to monopolize in-app purchases1 might strike one as bold to the point of hubristic. But I think this is the reasoning behind it:
Companies want their services and applications present on Apple devices because they are well regarded and extremely popular. Nevertheless, Apple almost certainly perceives the threat that a large number of cheaper (but nevertheless extremely capable) devices running the Android OS will significantly limit future iPhone/iPad sales. One direct way of neutralizing this threat is to make the Apple devices cheaper to buy2.
A device can be continue to be made to the same high standards (preserving it’s brand status) but sold more cheaply if it can become the source of other revenue. If Google can subsidize handset manufacturers by giving them Android for free in anticipation of future advertising revenue, one might reason that Apple can compete by subsidizing their own hardware with the burgeoning revenue from in-app purchases.
A virtuous circle for Apple may emerge: lower hardware pricing yielding more users, forcing online merchants to sell via Apple’s devices, generating more revenue for Apple that can be used to further subsidize hardware prices.
I don’t often share my predictions or analysis on my blog (not enough time - I’d never get any coding done) so I’m not used to waiting to see if events bear me out. This time, I’ll be following the tech news about Apple a bit more closely - I might be able to say “I was right”.
This a copy of a response I left on Al Sutton’s blog. It tries to explain with a simple example, why I would be uneasy allowing Amazon to adjust the pricing of my Android applications. I have no plans to sell any of my applications through Amazon. There are several reasons for this, but here’s one:
Suppose I run a company which has spent $100,000 developing an Android application that has a ‘list price’ of $1. Like all hopeful businessmen, I am expecting the application will be popular – but I don’t know.
I put the application for sale on the Google Market and the Amazon Market. In what follows I’m going to ignore tax to simplify things, and keep the analysis tractable by assuming that all customers have access to both markets.
Let’s look at three scenarios:
Contrary to my hopes, the app is not popular. It sells 500 copies on each market, earning the company a total of $700. Amazon don’t bother to promote or discount this unpopular application.
The app is well received, it sells 50,000 copies on each market, earning the company a total of $70,000. Amazon decide to adjust my price in an attempt to boost sales. It works, the price is halved and it sells an extra 100,000 copies at 50¢ netting an extra $35,000. Relief, the company has broken even (anyone who has actually run a company on a P&L basis will empathize at this point) but with a profit of only $5000. Note however that Amazon have made any further sales in the Google Market very unlikely.
The app is wildly popular and 1M people want to buy it! If the pricing remained unchanged, this would bring the company $700,000 revenue. But Amazon are tracking the download numbers and the interest in the application becomes obvious immediately. Amazon reason that by reducing the sale price of this popular application they can double their sales of the application by taking all of the sales that would have gone to the Google Market. They will also benefit from the additional traffic to Amazon Market in the form of extra sales of other applications. So they halve the price; it makes little difference to the number of sales because people want the application anyway. Every purchaser buys the application from the Amazon Market instead of the Google Market because it’s cheaper there and the company makes $350,000. Amazon have just cost my company $350,000!
Given that, as the person running the company, I’m only likely to invest time in developing applications that I hope will result in (3), why would I sell my application via the Amazon Market?
