I was interviewed by Scott Olson over at Founder’s Buzz about how the mobile software world has changed in the last dozen years. This builds off my A New Year, A New Perspective: Web Economics in an App World post where I synthesize a number of thoughts on the fundamental P’s of marketing, hitting each on product, place, promotion and price in this never-ending quest to build a company.
I hope you will head on over to Founder’s Buzz to listen to the six minute interview.
I have been writing recently about how the real mobile war is not between Android and iOS but between smartphone vendors and the carriers. So the natural question coming out of Apple’s Verizon deal is whether this will change the dynamics in this war.
The short answer: no.
Apple is the exception that proves the rule. When it comes to the smartphone world, only Apple is more powerful than the carriers. Google is subservient in this space due to the way they distribute Android. Anyone can use it and the carriers are happy to do just that. Other licensees could put their foot down but won’t. Motorola, RIM, Samsung, LG, HTC seem to be too reliant on the carrier distribution models to fight AT&T, Verizon and the rest. Microsoft’s distribution model has the same problems as Android’s — relying on licensees makes it beholden to the licensees, not the consumers. Besides, Windows Phone 7 is inconsequential right now as Microsoft’s discontinued Windows Mobile operating system is still outselling the new OS. (HP/Palm could follow Apple’s lead but is a massive wildcard right now.)
So what does the Apple-Verizon relationship mean? Nothing at all in the short term but everything in the long term. If Apple becomes the 80% market share winner then the carriers will bend to its will. If Apple becomes the 20% market share winner then carriers will continue to treat it as an outlier, letting Apple do what it wants as the carriers wield the Android shield.
January starts my 14th year running Infinity Softworks and being in the mobile space. I have seen this market change drastically in those years, from a market dominated by Palm to a market dictated by Microsoft, from handheld computers to smartphones, from Nokia and BlackBerry to Apple and Google. And, from my perspective, the most important change: from software to apps.
I have struggled with these changes the last few years. The methods to market an app have changed drastically with the introduction of app stores. The levers of marketing — place, product, price and promotion — have been reduced by one, eliminating a lot of control we used to have as developers, and the extreme focus of finding all apps in the same place forces a decrease in price. (Amazing how a speech I gave two years ago is still applicable. I just didn’t realize how much.)
powerOne calculator for Palm OS and Windows Mobile ran anywhere from $60 to $160. Now our attempts to raise the price to $10 fails. $4.99, it turns out, is the optimal price. As Fred Wilson pointed out, the economics of mobile are trending toward web economics where alternative licensing models are the norm: micro-purchases, subscriptions, freemium, ad-supported. No surprise that the revenue generated from in app purchases (micro-purchases) is about to pass licensed software revenues.
But while the economics of mobile may be converging with the web, I am increasingly convinced that distribution will not. In other words, I don’t believe that the default way for consumers to use apps in the mobile space will be via a web site; instead, the average consumer will always prefer to download apps. (This is not to say we won’t use the web technologies of JavaScript, HTML and CSS to write them.)
Horace Dediu lays out this argument beautifully, although I don’t think he thought of it the way I am, in his recent article on the mistake of making strategic decisions based on technology:
Google should be asking itself if mobile computing will allow browsing to remain the predominant interface for internet consumption. If, as I suspect, it won’t then no amount of browser tweaking will help. The browser is already infrastructural. It can’t be the object of strategic focus.
To get an idea of how this would work consider Flipboard. Flipboard turns the entire browsing paradigm inside-out. Instead of consuming social media inside a browser, the app presents it in a more natural magazine-like format.
The browser is infrastructure: it is the technology we use when we don’t have an app to use. At least for the average consumer (not most of us technologists who will read this article) it is far more comfortable to run an app then open a browser, type in a url and use a web site. The browser — or more specifically the web — is infrastructure. It acts as a protocol that lets us keep currency rates up-to-date or connects us to news or enables sharing with friends.
And that leads me back to powerOne. In the past three years of developing powerOne first for BlackBerry and then iOS it has become clear to me that that product and that business model are not sustainable. powerOne is a “heavy” application, extremely complex in development and advancement. While it goes far beyond what other calculators do in the iOS App Store, the app store dynamic makes it nearly impossible to differentiate from the other 5,000 calculators there. The complexity of the app means it takes six to nine months to port to a new platform, taking away this small company’s nimbleness.
There is another, much more dangerous problem with powerOne. We built our market in the old days with partnerships and affiliate relationships. We bundled with Palm, Sony, Garmin and other hardware vendors. We did affiliate deals with leading companies in real estate and education. We partnered with leading marketers in the space to promote our solutions. These models — where us and the partner make money on every transaction — are gone because of the diminished flexibility of app stores. We are restricted to the models that make sense in those environments and affiliate deals are not currently implemented.
So it has become clear to me that my thinking needs to change. It is critical to think about apps as connected entities to the world at large. It is critical to think about apps as “light-weight” and extremely portable so we can remain nimble and take advantage of the shifting market dynamics and the fact that our customers are often using three or four different computing devices. And most of all it is critical to think about how to market in a world where all purchase decisions are compressed into 2000 character descriptions and a few pictures. I have to think about the web economics and how they affect our business.
The business has changed, web economics are taking over, and how we market and build products needs to adjust, fast.
I have heard a lot of theories about why Apple will or why Apple won’t dominate tablets.
The common argument in favor is that Apple has a head start and basically invented the first mass consumed tablet. They didn’t do this with PCs. The early days of PCs were a wild west affair with lots of manufacturers selling a small number of devices. (The Apple II, wildly successful, sold 16,000 units in its first year.) Of course, early leads often evaporate. Need an example? How about TiVo.
The common argument against is that the tablet market will be the PC market all over again with Google as Microsoft and Apple as Apple. This is wrong, too. The market dynamics are different. Google makes money from advertising, not software sales, so is unmotivated to only make a YouTube app, for example, for Android only. And Apple of 1987 is not Apple of 2007. We no longer have compatibility issues, software sales (apps) is a strong reason for owning a device or not, and there is no big, standalone behemoth to “make a market winner” as IBM did with Microsoft and Intel. Never mind the democratizing effects of the web.
So what do I think? I think Apple and the iPad will dominate the market but for a different reason than any I have heard: distribution.
First, the tablet market is vastly different from the smartphone market for this reason. We have been trained here in the United States to go to a special store to buy our phones. These stores, of course, are owned by the carriers and these carriers, to get you to sign up for multiple years, heavily discount these phones making them all appear equal — or relatively so — in price.
I believe tablets are different. I think our expectation will be to buy a tablet and then sign up for a service, if we even need one, and I don’t believe we will be hoodwinked into a multi-year contract and service plan. In fact, I don’t think most people will even buy a wireless plan to go with their device. Instead they will use the built-in wifi.
This levels the playing field. Now the game is about distribution. Apple’s competitors — RIM, Palm, Samsung, etc. — have never known a world where they sell outside of a carrier store. Android licensees and RIM, in particular, have never sold a device without carrier marketing and subsidy. Their inclination will be to sell through the same channel they know and have developed. Except this partner wants to ensure a wireless subscription and will require their partners to include it.
Apple, on the other hand, (and HP/Palm to an extent) sell everywhere: Apple stores, Best Buy, Radio Shack, Target, Walmart, even Marshall’s/TJ Maxx for goodness sakes. (What the heck is Marshall’s/TJ Maxx doing selling iPads??) Oh, and they sell them via AT&T and Verizon also.
Apple has the power of distribution, a ubiquitous brand, on its side. They aren’t restricted to a single store or a single carrier. And price subsidies will play far less of a factor. In the end, Apple’s iPad will win because it can be found and bought everywhere.
I have been thinking a lot about the make-up of the smartphone market. Two important articles I wrote earlier this year:
I believe in the next few years three operating systems will dominate the mobile landscape (smartphone, tablet and other mobile devices): Android, iOS and Windows Phone 7. These three operating systems will account for 99% of all sold operating systems.
Android and iOS are obvious to me. Both are strong leaders with lots of momentum. Apple, I believe, will dominate tablets and portable entertainment devices (a la iPod) for reasons not discussed elsewhere. (An article is up-coming on this topic.) Android, because of its “free” nature will be the poster child for carriers worldwide and therefore has the competitive edge to be dominant. Given that, I think the two operating systems will make up 90% of the market and the split in market share will be close to 50-40 with Android leading.
Windows Phone 7 is my wildcard. First I think there is a high probability of Microsoft leveraging its Office/Exchange/Windows/.NET infrastructure here. Even though they aren’t as prevalent in the tech community, there are some huge Windows fanboys that can rival the Apple ones. Most importantly, though, Microsoft can’t give up. They have to be a player in this market or they risk losing their supremacy in operating systems. Given that, I don’t see them as a strong competitor, instead taking a 8-9% market share.
Of course this could all fall apart. Apple could fail to adjust their breadth of product, instead staying only at the high end. (Unlikely, I think, based on their iPod history. See John Gruber’s excellent summary of recent Android v. iOS discussions over at Daring Fireball.) Android could become so fragmented that it is really like all the licensees having their own operating system. Windows Phone 7 could just be too late to play. RIM, Palm and Nokia could all do something drastic in 2011 to stay in the game.
But if I had to bet, I’d take Android, iOS and Windows Phone 7 to win, place and show in the market share game.
Elia Insider 