Archives for February 2011

Last week, Apple expanded its In App Purchase (IAP) technology to include support for content subscriptions. Without that native support, developers have been charging for subscriptions through their own billing systems. This is no longer the case, according to the latest App Store Review Guidelines. App Store apps now:

1. May only use IAP to sell content and services from within the app (Section 11.2)
2. Must not direct users to commerce or transactions outside the IAP system (Section 11.14)
3. Must price IAP and subscription content the same as, or lower than, equivalent content offered outside the app (Section 11.13)

First things first: IAP provides a superior user experience in most, if not all cases. I agree to buy something from my app and get it instantly with no hassle, no web forms and no worries that the provider is going to sell me out.

Isn’t that all a user cares about? Right now, perhaps. But if businesses play hardball — and they might, as Android adoption continues to accelerate — then iOS users can find themselves missing out on a lot of content. That would be bad for users, and it would be bad for Apple. So let’s go over the stickier points of this debate.

The 30% Cut

Some say the 70/30 revenue split that accompanies IAP is too high for subscriptions, but precedent wins here. 30% to Apple across the board — app sales, IAP, and now subscriptions — is consistent, clear, and uncheatable. That cheating bit is significant: a 10% commission for subscriptions, for example, would see developers adopting the subscription system en masse so they could keep more money. Apps that were once $2.99 would suddenly be asking for installments like late-night infomercials. This would not only be a huge headache for Apple, but it would be an awful user experience. Don’t expect subscriptions to deviate from a 70/30 split unless everything does.

This may in fact all be red herring: the New York Times reports “Publishers say their objections are less about the steep revenue split than the lack of data.” That “data” is, of course, your personal information — which they intend to monetize further in ways you probably wouldn’t like very much. This is one area that I hope Apple never compromises on.

The Pricing Trap

The requirement that IAP content be offered “at the same price or less than it is offered outside the app,” combined with the 70/30 split, means developers must make less money off of iOS by definition. They can’t price their IAP content higher to offset the commission, nor can they price their own retail content lower.

If I am interpreting this correctly, I can’t bring myself to see it as reasonable. Not only do businesses have every right to price their products on the open market as they see fit, but I would actually be willing to pay a premium for all the aforementioned advantages provided by IAP. Why not let them experiment?

I also don’t see how it’s even remotely enforceable. Are Apple staffers seriously going to check every vendor website for sale prices on a regular basis?

I think a great deal of this drama could go away if Apple dropped section 11.13 while keeping section 11.14: Your prices on your store are your business; just don’t be a jerk and advertise the difference all over ours.

The Monopoly Card

The Wall Street Journal claims that the DOJ and FTC are already looking into this. I’m not an antitrust lawyer, but I’ll say this much: anyone truly incensed by these new terms can — and should — take their ball and go to Android. It may be the best way to make a long-term statement that forces Apple’s hand. There’s a word for that: competition.

But are the terms so onerous as to justify leaving tens of millions of potential customers behind? Apple’s betting that they aren’t. And it’s not just the number of customers, but the type of customer: very recent data suggests that iOS users are spending almost twenty times as much money as Android users, despite being merely one and a half times as numerous. (It’s not clear whether the Nielsen numbers include iPad or iPod touch, but that’s still not enough to explain the huge discrepancy.) As long as iOS is where people are making money — regardless of market share — Apple will have the upper hand in policy discussions.

The relationship Apple is crafting here is the same relationship it already has with music companies: the other party is almost completely dependent on Apple’s whims. And if the DOJ hasn’t come down on iTunes, where Apple’s dominance is far less contested, I don’t see it touching this nascent market. (It’s worth noting that this is exactly the kind of relationship Apple hates being on the wrong side of — see Java and Flash.)

So What’s the Problem?

The problem is that Apple has changed the game on people. John Paczkowski clarified that “Apple’s made no change to its App Store guidelines–it’s simply enforcing a rule that’s been in them all along.” That doesn’t really close the book. Whatever the fine print says, Apple is no longer letting developers do things it had been letting them do — and build businesses on — for almost two years, and many developers are quite understandably upset about that.

In other words, I think we’d have had a much different conversation about this in June 2009, when iPhone OS 3.0 was released with IAP, than we’re having today. And that does matter, however objective you try to be on the subject.

This, ironically, is exactly why Apple’s terms tend to be so vague and tough at first: it’s easier to remove restrictions than to add them. We’ve seen this, as Craig Hockenberry reminds us, with user-generated content, flatulents, and politics; we’ve seen it with technology too. This kerfuffle is proof that Apple’s typical strategy, while often unpopular, is a saner approach.

Sign of the Times

Whenever a policy change like this occurs, I ask, How does this strengthen the platform? How does this sell more iPhones? I can’t answer either of those questions, and that, to me, is the most interesting part of this whole debate.

Third party products have historically made an indirect contributionto Apple’s revenues by making Apple’s own products more attractive. This indirect effect has become more important over time: Apple has never shared the credit for its success with third parties as willingly as it has in the last few years’ worth of iPhone commercials.

These new IAP rules mark a new, significant step in the evolution of that view: third party products are now a direct and significant revenue source — so much so that Apple is willing to risk alienating entire classes of apps from the platform in order to secure that revenue.

I never thought I’d see an Apple platform become large enough to yield this kind of discussion. For better or for worse, it’s an illustration of just how far the company has come in the last decade.

Thanks to my good friend Steve (not Jobs) for helping me think through some of these points.

I was still at Apple when Nokia announced it was turning its stake in Symbian into full ownership. The iPhone was days away from being a year old. I emailed my team and said something to the effect of “We’ve won, and our competitors know it.”

Nokia has been running scared for years. The Symbian buyout was an acknowledgement that making truly great next-generation mobile products would be impossible without control over both hardware and software. That was hundreds of millions of dollars and nearly three years ago. It just wasn’t happening at Nokia, and if it hasn’t happened by now, then it wasn’t going to anytime soon. But enough about Nokia, because the “Nokia” we knew is a thing of the past. Today’s news is all about Microsoft.

Microsoft’s partners, notably HP and Dell, are running away as quickly as possible. Windows Phone 7 shows promise, but I believe Microsoft understands the same thing Nokia did, from the other side: it has software, but no hardware. In Nokia, Microsoft now has an established, experienced, recognized OEM with one of its own men at the helm.

I don’t think any of us properly appreciate what has happened here just yet.

Rumors of this “partnership” started flying within hours of Stephen Elop’s move being announced — suggesting even that Nokia’s board had explicitly approved the idea in the process of hiring him. Within three months, the rumors were in full force among tech blogs and media. If you go back a bit further, you’ll find additional rumors that Microsoft was trying to outright take Nokia over.

So in the span of one year, we have Microsoft failing to acquire Nokia, “losing” a top executive, and now having one of the most recognizable mobile hardware vendors in the world under its thumb. There’s no question in my mind that the next generation of flagship Windows Phones will come from Nokia, and for that, Microsoft will have unprecedented influence over the hardware that runs its software. We like to think of Steve Ballmer throwing chairs when his executives leave. I think this time he told Elop, “Fine. Go get me some hardware I can own.” Elop did.

But what will they do with it? Microsoft has had some success in hardware, notably in its Xbox division—but not so much in making it profitable. Nokia’s problems, according to Elop, are with focus and execution—two things I wouldn’t say Microsoft is known for. (The length of Elop’s memo is an irony in and of itself, to that end.) All in all, this was one of very few choices Nokia could have made; it’s certainly better than staying the course, which is what I feared we would hear today. For Microsoft, though, it’s huge.

I have absolutely no qualms about calling this new regime at Nokia a puppet government. This is far and away the most brilliant move of Ballmer’s tenure. Whether it pays off is another question entirely.

[UPDATE: Former Microsoft exec Chris Weber has just been named President of Nokia Inc. (US). This is a coup, folks.]