Content creators face many long-term risks in the mobile ecosystem. These include a loss of pricing power, a reduction of the product’s value to commodity level, and a never-ending proliferation of available substitutes. Developers in the app ecosystem—none of whom are willing to speak on the record—variously describe life in the app ecosystem as “tyranny,” “misery,” and “a living hell.”
Certainly, the App Dictator has a number of tools to wield power to keep its subjects in line:
> Banishment: The platform owner can remove any app for seemingly arbitrary reasons.
> Displacement: The platform owner may decide to get into the same business as a successful app developer, forcing the app out.
> Disruption: The platform owner can provide access to free or nearly free alternatives that undermine a successful app’s business model.
> Suppression: The platform owner can manipulate search results to bury an app under other competing products, making the app hard to find. That’s what the Federal Trade Commission determined that Google had done, skewing search results to favor Google apps and products.
This treatment puts app developers on the profit-eroding treadmill of spending endless marketing dollars to maintain visibility.
> Bait and switch: The platform owner can arbitrarily change the business model long after a developer has garnered a big audience.
> Addiction: The platform owner can put in place so many constraints that developers, publishers, and other participants who adapt find themselves inextricably hooked as the revenue grows.
They discover they cannot afford to leave because it requires too much time and effort to retool their business process in order to pursue an alternative strategy.
Closed economies are rife with strange distortions, and the App Dictatorship is no exception. With more than 1.3 million apps jockeying for visibility and some kind of advantage in an app store, it’s no surprise that the overwhelming majority of apps are free. Developers are willing to slash prices in order to attract customers. And how do consumers find the app they want to download in a store that has famously poor navigation?
Developers will often hire a marketing company on a cost-per-install (CPI) basis, which means that the marketing firm gets paid every time a player downloads and installs the app, whether or not the developer makes money. According to market research firm Chartboost, the average cost per install ranges from $1.00 on Android to $2.30 on the iPad. This is like paying another company to give your
product away for free. Every serious developer and publishing company does this, sometimes
spending hundreds of thousands or even millions of dollars on CPI marketing just to move the needle on its download volume, hoping thereby to catapult a new title onto the Top 100 list and thereby become one of the lucky 1.6 percent whose apps generate millions of dollars. The most successful game publishers on iOS are hooked on paid installs, spending hundreds of thousands of dollars every day on this peculiar form of marketing just to preserve their position on the list. And if you want to make money as a developer in the App Store, getting on a Top 100 list is a matter of life or death because that’s the way consumers will find your product.
Appeals to Apple won’t do much good. The company is famously aloof to developer concerns.
Every developer I spoke to is hesitant to complain for fear of retaliation. After all, Apple sets forth a warning explicitly in the App Store Review Guidelines: “If you run to the press and trash us, it never helps.” Developers would rather take their lumps in the mosh pit, hoping that their next app breaks out. Occasionally Apple will grace a compliant developer with featured placement in the store, but the rules that govern this kind of favor are murky. Tales of secret payoffs, lavish gifts, and other
attempts to grease the wheels are often told but hard to verify. Most developers and publishers end up spending the bulk of their profit (after the 30 percent tax) on paid installations or other forms of
marketing for mobile apps.
For all but a lucky few titles it is a profitless exercise, the vaporized version of sharecropping or tenant farming, whereby all the cash earned by those workers is spent on provisions at the company store. The egalitarian—or indifferent—nature of the vaporized marketplace presents a sobering reality for many, and the same dynamics pertain regardless of the size or nature of the business.
The agency model immunizes Apple from the fate of the publisher: Apple gets the same cut whether the app makes $1 or $100 million. In one sense this is fair, but it may come as a rude awakening to the big-box retailer, global consumer product brand, or major media company that finds it has no greater leverage than a basement startup. In an app dictatorship, there is no negotiation at all.
Broadly, the App Dictatorship should be a concern for everyone who cares about free speech and the sharing of ideas. For years, civil liberties advocates and supporters of the open World Wide Web have clashed with those who seek to impose controls on the Internet, such as conservative political groups, religious organizations, copyright owners, and even authoritarian governments. Whether they frame the issue as copyright infringement or hate speech or political dissent, what unites these
disparate groups is their goal of imposing some form of control over free expression on the Web.
Civil libertarians resist this fiercely because they know that once a mechanism for censorship is established for any reason, it will inevitably be expanded and ultimately abused. It is not a huge step from banning bikinis and racy fare to banning political speech, satire, parody, criticism, and negative product reviews. From the perspective of civil libertarians, each constraint chokes discourse a bit more until free speech no longer exists.
In mobile, the battle has already been lost. There is no concept of free speech inside the App Dictatorship, and that’s exactly why we should all be concerned. In the United States, only
government entities are required to support free speech. Private companies have no such obligation, which is why there are no political protests at the local shopping mall. But in the Vaporized
Economy, there is no public commons. There is no open forum for the free exchange of ideas; it’s all private enclosures. Mobile apps are not like web pages: they are built from proprietary toolkits, not open standard software, and they are inextricably linked with a closed system.
This closed environment is the fastest-growing medium in history. Mobile Internet usage is soaring, surpassing desktop Internet and even television as the primary media activity in most industrialized nations, and the overwhelming majority of that usage occurs within apps. According to the market research firm Flurry, US consumers spend two hours and thirty-eight minutes a day on their
smartphones, and more than 86 percent of that time is spent inside of highly controlled apps, not on the browser on the open Web. The constraints imposed on app developers matter to everybody.
For Apple, this represents a strange reversal of an inspiring heritage. The company sprang from the Homebrew Computer Club, a movement based on the free exchange of ideas and open access to the fledgling personal computer ecosystem as a tool for free expression and creativity.
STRATEGIES FOR SURVIVAL
Once a company begins to participate in an app ecosystem, it is extraordinarily difficult to pull out.
The more time, energy, and marketing resources are invested into mobile apps, the more they tend to be bound to the platform. And developers invest heavily to promote awareness of their products in the app stores of Apple, Google, and Amazon. Of course, these campaigns tend to benefit the platform more than the developer since telling customers to “find us in the App Store” just worsens the
developers’ dependency on them.
Most mobile developers yearn for the adoption of HTML5, a new version of the page-description language that democratized publishing on the Internet. If it works as promised, it will give developers the opportunity to create app-like Web experiences that look and feel like iOS apps but that can live outside the App Store. However, HTML5 is not quite ready for prime time.
Despite all the present friction and restriction, somehow thousands of companies do manage to operate in these environments. So, what can you do? Which strategies are used by developers to survive and thrive in the digital ecosystem?
1. Sell a digital service along with your product; transact outside the App Store. The ideal business model is to establish a direct-to-consumer service that enables you to bill the customer directly. You’ll want to provide a free app in the App Store that gives subscribers mobile access to the service. This is easier said than done. It’s very hard to convince consumers to sign up and provide credit card information but it is worth the effort.
2. Be on every platform. Port your app; in other words, optimize it for all the leading platforms. Learn to tolerate the low-margin lifestyle after the 30 percent revenue split. Compensate for low profit by aiming for vast reach. Cultivate a preferred relationship with Apple, Amazon, Facebook, Microsoft, and Google to ensure the best possible placement of your product.
3. Offer an app for free. With this strategy, you give the first taste of the product, service, or game away for free, get users hooked, and then convert as many as possible to paying customers. Basically you use the App Store to develop distribution and marketing channels that reach a large number of consumers who use the app for free, and then upsell a percentage of users to a premium tier or premium features. It’s called monetizing usage. The business model was perfected in the highly competitive mobile game industry, where game developers have evolved a suite of sophisticated product design features and highly addictive game mechanics to manipulate player behavior. In 2013,
free games with in-app-purchases zoomed from 77 to 92 percent of all mobile game revenue, reported the mobile analytics firm Distimo. It is a highly effective—if sometimes coercive—
approach, as the top-grossing mobile games with in-app purchases generate hundreds of millions of dollars a year. For instance, market intelligence firm ThinkGaming.com reports that Candy Crush Saga, one of the top-grossing free-to-play apps on both iOS and Android, generates $907,000 a day in the US, earning $330 million in the year.
4. Roll your own. Some companies build their own marketplaces and distribution platforms outside of the App Dictatorship or a meta-marketplace that spans the big Internet platforms. This step is the hardest of all to master but it’s not impossible, especially for those with vision and stamina who are the first to define a new category. Netflix did it. Amazon Kindle did too. Uber and Airbnb are in the process. To accomplish this ninja move, you must provide the most efficient switchboard marketplace in your category and remain studiously neutral about all of the offerings. Be prepared to fight like hell to maintain your position and preserve your direct relationship with the customer.
5. Most important of all: study the platform. If you are going to operate in the Vaporized Economy, you must be a student of Apple, Google, Amazon, and the other Internet giants. If you’re familiar with these dynamics you’ll need to pay attention, but if you’re coming from a brick-and-mortar industry where these tactics are virtually unknown, redouble your efforts. Even the slightest tweak to their ecosystem can determine your fate or your fortune. And if you rely upon external vendors to manage your mobile apps and your relations with the Internet giants, you are about to get blindsided. Ignore this
information at your peril.
Google’s approach: mimic Microsoft
Of all the Internet giants to study, pay especially close attention to Google. Although Apple is a formidable player, the Apple strategy centers squarely on the iPhone. Google is less concentrated on a single value control point or physical product and therefore provides an alternative example that is a bit more vaporized. A big chunk of Google’s strategy seems to be based on tactics from the
Microsoft playbook. No surprise: Google debuted at a time when Microsoft dominated the computer industry, and since then Google has hired thousands of former Microsoft employees.
The Seattle software giant always understood the value of a thriving developer ecosystem. For twenty-five years Microsoft enjoyed an enviable position as an ecosystem overlord by maintaining tight control over Windows OS, which drove a wedge between the PC and the applications that made the personal computer useful. Those applications made Windows more valuable, and Microsoft leveraged that fact to extract more money from the hardware companies. At the same time, the company continually expanded the value of its software by absorbing and bundling more and more features: often what were previously stand-alone applications from independent software vendors became part of the platform, or part of the Office Suite, in Microsoft’s next release.
Microsoft set the template for domination that many big Internet companies have followed:
> Starve your rivals by bundling free products with your core product.
> Enlist a huge army of developers to support your mission.
> Extract as much value as you can from the ecosystem.
Google has modified this template to succeed in today’s Vaporized Economy.
1. Commoditize your complements. Complements are products that must be bought together in order to be useful, like hot dogs and buns, cars and tires—or an operating system and a computer. If you want to increase the value of your core product, one smart tactic is to drive down the price of all
complementary products. That tends to drive up demand for your product. As software programmer Joel Spolsky wrote in a widely-cited blog post titled “Strategy Letter V,” Microsoft commoditized the PC, which made Windows incredibly valuable. Similarly, because Google’s core search and advertising business grows linearly with every additional person on the Web, it makes sense for Google to commoditize anything that will attract more users to the Web, including formerly valuable content such as news, headlines, books, maps, video, and music. Google offers an ever-growing suite of free services (like email, browsers, productivity apps, creativity apps) and they deftly utilize open-source software projects like Android to disable the revenue engine of their biggest rivals. No wonder competitors and producers of complementary goods struggle to achieve profit inside
Google’s domain.
2. Seize the value control points. To maintain their invisible information empires, the leading companies seek to exert control over the value network surrounding their products. Each company manages these control points in its own unique way, but no leading company ever relinquishes control of the
essentials. The app economy enables Amazon to pursue a different strategy than Apple or Google, but all of these companies maintain a firm grip on their primary value control points. No company has more value control points than Google, which spans advertising, e-commerce, social media, video and mobile, as well as a full suite of hardware products.
3. Own the path of progress. Microsoft was late to the Internet and it missed mobile completely. As a result it lost control of the path of progress. Google is not about to make the same mistake. That’s why it is buying or investing in everything that might emerge as the next frontier of computing when the desktop browser and PC decline completely. We’ll take a closer look at this strategy in Chapters 6 and 7.
Also, to fend off threats from the Internet service providers and mobile operators upon whose networks Google relies, the company is building its own ultra-high-speed broadband network in the
US and a floating one suspended from balloons in the skies over New Zealand. Search is still at the core of Google’s business, enabling a dynamic marketplace of bidders who want their information to be findable, and encompassing several gushing geysers of user-generated information and a huge pool of third-party developers, vendors, merchants, and apps that rely upon Google data. By controlling this rich and complex ecosystem, Google is in the enviable position of being able to choose where to take its profit margin. This is a conscious choice among known alternatives. In other words, Google chooses to be hugely profitable in advertising, so that all of its other businesses can operate on thin margins or no profit at all while reinforcing the core data asset and attracting creative developers whose apps pull in ever-more users who generate ever-more data for Google to mine.
What all of these initiatives have in common is data. Google’s mission is to organize the world’s information, and the company interprets that mission rather broadly. If there is information attached to it, Google will find a way to seize it, control it, and build a moat around it. As a result, I would not want to be an old-school manufacturing company, publisher, insurance firm, transportation company,
or educational institution facing off against Google without a solid understanding of how to control the data flowing through my industry.
Information is certain to grow faster than anything else generated by human beings far into the foreseeable future, and I expect to find Google at the center of that growth for a very long time to come.
ASK YOURSELF
> What is the primary business objective behind your participation in the App Store? To reach consumers directly on their preferred device? To offer content in the fastest-growing medium in history? To make money? To displace a rival? Each goal will require a different strategic
approach.
> How much are you willing to sacrifice in order to reach that goal? Are you okay with zero profit, or even losing money, to gain exposure and mindshare? Are you willing to pay a marketing firm to give your product away for free?
> Which value control points can you maintain? Is it possible for you to enjoy the benefit of distribution via the App Store in order to build a direct channel to consumers and extract the benefit elsewhere?
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