First Comes Power

January 3, 2009 Ann Arbor, MI

There is a frenzy of conversation on the Internet about pricing at the iPhone App Store (examples here, there and everywhere). While I'm interested in all of the different perspectives that are shared from users, developers and observers, I don't think that enough attention is paid to Apple's objective. They certainly don't want poor applications, or for developers of iPhone applications to have unsustainable business models. But, while they want to make short-term profit from iPhone applications, they're more interested in maximizing long-term profit for the entire iPhone franchise. The KEY to maximizing iPhone profit is to create very high switching costs for users, just as they did for the iPod via the iTunes Music Store. Apple is using the App Store to create switching costs, and they know that if all of their users have "invested" in many little applications that will only work on the iPhone (a la songs from the iTunes Music Store), they will eventually have users locked in to a long-term investment in the iPhone franchise. The profit from the successful execution of the iPhone franchise strategy will dwarf any amount of profit that they could suboptimize if they focused on what was best for the iPhone application development community.

There is no killer APP for the iPhone, but there is a killer APP STORE. Until they believe that their users have hit the point-of-no-return, they will continue to optimize the app store around volume, not quality or price. Volume = switching costs = long-term domination.

Can't Apple have its cake and eat it too?

Sure. There's no reason why Apple couldn't modify the app store to balance volume with quality and price. And they will. But, they know how close they are to becoming THE dominant mobile phone company in the world and they're not going to take any chances. Once they've locked users in, they'll shift focus to mine as much profit as possible from each of those users each year. That will mean having them purchase more expensive applications (in addition to the little knick knacks that dominate the store now), and driving increasingly tough bargains with the cell phone networks.

What's the lesson for developers?

Don't waste your time hoping that Apple will change its strategy to make it easier for you to sell your expensive applications and more difficult for other developers to sell their inexpensive applications. And, don't count on ever getting any more free advertising from Apple than you get now. One way or another, you'll have to pay for your exposure (marketing $s or pricing $s).

Do take note of their strategy and focus on switching costs. If you take the long view and build a defensible competitive advantage by creating value for users and significant barriers to entry, you will do well.

To sum up Apple's strategy (and Tony Montana's):

Step #1: Get Power

Step #2: Use Power

It's a good strategy.

Originally posted here, and linked to by Daring Fireball.