OSX Lion, iOS 5, and iCloud

[txlaw]

The whole argument seems to be centered on how big and beautiful the streaming service businesses become.  We both think it's coming, but when and how amazing it will be is pure speculation.  I'll summarize it this way: the value of the media locked into the Apple ecosystem reduces as the quality, cost-effectiveness and breadth-of-selection of streaming services increases.  I think streaming overtaking traditional media purchases is still a ways off.  So, for as long as that's the case, the lock-in continues to be an effective tool for increasing product stickiness (my opinion).

 

Don't you think the timing is odd for Apple to introduce iCloud as is?  I mean, if all-you-can-eat audio streaming were just around the corner, wouldn't this iCloud thing look lame in comparison?  I can't reconcile this.  I mean, if anyone knows what the record companies are working on, it's Apple, and Apple's saying this is how you're going to stream.

 

I guess the way I reconcile iCloud with the all-you-can-eat audio streaming future that I believe is right around the corner (with "old content" and "new content" catalogs that are priced differently) is by chalking up this incremental improvement to Apple's relationships with the record companies and the wireless last mile providers.

 

With respect to the record companies, I think they're probably still working out amongst themselves how to go about doing this sort of service in the US.  There are so many constituents involved: radio broadcasters, online radio providers, TV music channels, retailers, artists, etc.  It could take a while to line everything up.

 

With respect to the wireless providers, any real music streaming service would have to work with our mobile devices, and the carriers simply cannot handle that data traffic at this time.  The carriers are a big bottleneck for getting an audio streaming service going. 

 

The subscription cut isn't about how much it costs to make the app in Apple vs. Android - these are one time costs that are sunk in a subscription model.  Plus they are relatively low (regardless of platform) compared to cost of the content you're supplying with the app.  When a publisher pushes a new edition, the incremental cost to put that edition onto Apple, Android, and the Web is nearly zero.  I don't think it's a problem that Apple charges more.  I think Apple should be able to charge whatever they want.  What I have a problem with is Apple also dictating the customer price to be the lowest price available.  This is a "dick move".

 

I guess I don't view it as a "dick move."  To some degree, I think it's what the first mover is entitled to until the market adjusts accordingly. 

 

If an app provider is going to make multiples of revenue on their upfront development costs and relatively small maintenance/improvement costs, and in large part due to the distribution channel of the top platform, I think it makes sense that the top platform provider requires that its app providers not sabotage the platform's lead by allowing competitor platforms to undercut on pricing of apps to the end user.  Especially since your major competitor could very well make the rev share of purchasing apps 0% since it works on an ad-based business model.

 

The reason that the percentage fee is higher is because Apple's essentially claiming that the ROI (i.e., the return on upfront development cost) on the iOS version of the app will be a higher multiple than the ROI for the Android version.  So the higher 30% fee shifts part of that excess return on the fixed cost of development to Apple.  It's just the pricing power of having the top platform.  Also, to some degree, the pricing power results from having access to "higher end" users.  Apple products are expensive and most people in the world won't be able to afford them, so Apple's user base could be more valuable on a per user basis. 

 

I believe the iAds rev share is also larger than AdMob's rev share for the same reasons, although I've heard that iAds sucks.

 

It will be interesting to see how all this changes if Android gets a much larger market share than iOS.

 

Oh I know *why* they don't have to pay.  I just don't agree with it.  There's a lot of things that are curated for me by Apple that I don't agree with.  No bikinis or boobs, except you, Sports Illustrated, and you Playboy.

 

Haha, fair enough.

[Guest VAL9000]

I guess the way I reconcile iCloud with the all-you-can-eat audio streaming future that I believe is right around the corner (with "old content" and "new content" catalogs that are priced differently) is by chalking up this incremental improvement to Apple's relationships with the record companies and the wireless last mile providers.

 

With respect to the record companies, I think they're probably still working out amongst themselves how to go about doing this sort of service in the US.  There are so many constituents involved: radio broadcasters, online radio providers, TV music channels, retailers, artists, etc.  It could take a while to line everything up.

 

With respect to the wireless providers, any real music streaming service would have to work with our mobile devices, and the carriers simply cannot handle that data traffic at this time.  The carriers are a big bottleneck for getting an audio streaming service going. 

Yeah, I think the record industry is dragging their feet on this, too.  They're collecting metrics from Apple, from Spotify, from Netflix and trying to decide how to maximize profits.  If I had to guess, I'd say iTunes plus Spotify.  iTunes new songs, then after some seasoning period they'd roll that music into streaming services.  This is closer to the model that the film industry uses (theater -> dvd -> netflix) and one that I think works pretty well for all parties.

 

If that's the model then a media ownership/rights moat probably won't hold up.

 

When the innovation gap closes and the media ownership moat dries up...  What does Apple have left?  Brand and the curated experience?

 

I guess I don't view it as a "dick move."  To some degree, I think it's what the first mover is entitled to until the market adjusts accordingly. 

 

If an app provider is going to make multiples of revenue on their upfront development costs and relatively small maintenance/improvement costs, and in large part due to the distribution channel of the top platform, I think it makes sense that the top platform provider requires that its app providers not sabotage the platform's lead by allowing competitor platforms to undercut on pricing of apps to the end user.  Especially since your major competitor could very well make the rev share of purchasing apps 0% since it works on an ad-based business model.

 

The reason that the percentage fee is higher is because Apple's essentially claiming that the ROI (i.e., the return on upfront development cost) on the iOS version of the app will be a higher multiple than the ROI for the Android version.  So the higher 30% fee shifts part of that excess return on the fixed cost of development to Apple.  It's just the pricing power of having the top platform.  Also, to some degree, the pricing power results from having access to "higher end" users.  Apple products are expensive and most people in the world won't be able to afford them, so Apple's user base could be more valuable on a per user basis. 

 

 

I've always been fine with the percentage fee being higher.  It's just the price fixing in conjunction with the fee that irked me.  Anyway, it seems that Apple has just changed their mind on this exact issue:

 

http://www.macrumors.com/2011/06/09/apple-reverses-course-on-in-app-subscriptions/

 

 

[txlaw]

If that's the model then a media ownership/rights moat probably won't hold up.

 

When the innovation gap closes and the media ownership moat dries up...  What does Apple have left?  Brand and the curated experience?

 

Yup, just brand, the curated experience, and possibly any supply chain advantages that allow them to secure the highest end hardware. 

 

That's why Apple needs to manage this trade off between the curated experience and the openness/choice factor over time if they really want their products to be in the hands of the most users possible.  They also have to lessen the control aspect over media/app distribution so that it becomes less draconian for publishers over time.  Otherwise, they will be constrained to low market share going forward. 

 

That's also why I think Apple would be stupid to forego making iTunes into the Netflix/ultimate storefront of music.  Because the media business is inherently a lock-down sort of business due to the copyright monopoly that is granted by law, it fits well with Apple's DNA.  If they can focus on being the major intermediary between content owners and users, that would be pretty lucrative and they wouldn't have to bet the farm on just selling their OS based on the curated experience.

 

Will they go that route?  Who knows?  I suspect that Jobs, who has lots of experience in the media field due to Disney/Pixar, has thought about this.

 

I've always been fine with the percentage fee being higher.  It's just the price fixing in conjunction with the fee that irked me.  Anyway, it seems that Apple has just changed their mind on this exact issue:

 

http://www.macrumors.com/2011/06/09/apple-reverses-course-on-in-app-subscriptions/

 

Very interesting.  It looks like Apple is treading that fine line and is willing to give in upon push back by its publisher partners.  That's a good thing for Apple shareholders (I'm not one, btw).

 

It also suggests that Apple understands the threat that web-based apps, as opposed to client-side apps, pose and is managing that risk accordingly as the competition heats up.

[DCG]

Apple is the retailer selling the subscriptions. I don't see how them taking a 30% cut is not fair. Retailers take a % off every product they sell. Retailers buy products at a wholesale price, and mark them up (usually at more than 30%!). Taking a % of the sale is how it works for digital products. Apple spends money on marketing, handles billing, and customer service. I don't understand why people think it's unfair for them to make a profit on things like apps and subscriptions.

[txlaw]

txlaw

 

You say, "constrained to low market share going forward."

 

What low market share are you talking about?  Do you mean the PC part of their business?

 

DW

 

I'm referring to Apple's share of the OS layer for Internet-connected devices that require a robust user interface. 

 

So, I'm talking about mobile phones, tablets, PCs, TV boxes, embedded computer surfaces, etc.

 

There's huge potential here.  All these guys -- MSFT, GOOG, and AAPL -- are battling it out to become a vital part of the OS layer.  That's my take on it, anyway.

[Guest VAL9000]

Very interesting.  It looks like Apple is treading that fine line and is willing to give in upon push back by its publisher partners.  That's a good thing for Apple shareholders (I'm not one, btw).

Me either, but by investing in GOOG and MSFT, I'm a stakeholder in AAPL's success (failure?).  With AAPL, I think the innovation risk is too high.  I'm convinced that others will come along and eat their lunch.  Then again, I've been saying that since the iPhone was released and so far I'm being proven wrong.  At least GOOG beat them to the punch of NFC / payments.

 

DCG - I don't know that people are disputing the 30%.  It's the price fixing that I found to be problematic.