Apple’s App ecosystem…some notes

For those of you who don’t read these things, here are some takeaways and bullet points from the latest report from Distimo. The full report can be found here: http://www.distimo.com/

Less than two months after the launch of the Mac App Store, a top 300 Mac application already generates half the revenue of a top 300 iPad application on average.

The average selling price of the top 300 applications is seven times higher in the Mac App Store ($11.21) than on the iPhone ($1.57) and almost three times higher than on the iPad ($4.19).

The Mac App Store has 2,225 applications available in the store approximately two months post-launch. Comparatively, the Apple App Store for iPad had 8,099 applications two months post-launch.

Although on the Mac gaming has been less popular than on Windows, the Mac App Store promises a bright future for Mac gaming: there are already 646 games in this store (29%), and 39% of the most popular applications are games as well.

The proportion of free applications in the Mac App Store is lower than in any of the other application stores analyzed in this report: only 12% of the applications are free.

The 300 most popular free and 300 most popular paid applications in the three Apple application platforms (iPhone, iPad and Mac App Store) are published by 1,014 publishers in total. 173 publishers distribute applications in more than one of these stores (17%), the Mac App Store being one of these stores in 49 cases (5%).

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Cell phone minutes will become Bandwidth minutes soon…

Have you tried to make a call from your iPad lately?  How about using your Droid cell with a fee Sip application (Sipdroid or pinger for the iPad or even GoogleVoice).   It works really well – crystal clear calls most of the time. All of these have something in common.  Eventually they will bypass your cell carrier using the internet and Voip.  What does this mean for the Verizon’s, AT & T’s, etc. of the world?  It means once an application like GoogleVoice (GV) becomes seamless and commonplace and as soon as 4G, Wimax etc.  becomes the norm,  people will begin to use free Voip and cut back on their cell usage in minutes.

bandwidth meter

cell phones get metered

The implications are big for these carriers. And I know they see it coming. They can’t prevent apps being developed and sold in the Android and Apple marketplace as they don’t do the gate keeping.    How will they hold on to their revenue base when erosion begins due to these apps + access to the web?  They will most likely follow in the footsteps of Time-Warner and the rest of the cable industry and monitor like a leaky faucet your bandwidth usage on your phone. They will trade minutes for bytes.  Charge us by the amount of bandwidth consumed.  So, enjoy the unlimited cell minutes some of you have on some cell plans today, because those days are numbered. Sure, there will be unlimited bandwidth usage, but my hunch is that at least initially like everything else that’s new, it will be costly.

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Apple and the War for the Mobile Market..its all about the carriers who hold the distribution key.

The short history of the computer industry is dominated by two well-known stories of business triumph and defeat. The first is the story of how mainframe makers failed to take the personal computer seriously until it was too late. Most of them faded away, and those that didn’t still failed to dominate the PC industry.

The second is the story of how Apple Computer refused to license its innovative new operating system to other hardware makers in the early days of the PC revolution and ended up ceding the market to Microsoft, which licensed its operating system far and wide.

The temptation to fit every new computer industry business conflict into one of these two molds is strong, and frequently surrendered to. For a modern example, look no further than the current battle for the mobile market between Apple, Google, RIM, and others. The first story may end up applying in the case of RIM, which might have waited a bit too long to recognize the primacy of the touchscreen and the mobile application marketplace. Or perhaps it applies to Microsoft, which refused to let go of the idea of shoehorning Windows onto a phone until very recently (or not).

But I want to talk about the second story, the one about the company deciding not to license its operating system to third-party hardware makers. In the mobile-market version of this story, Google is Microsoft, Android is Windows, iOS is the Macintosh operating system, and Apple is, well, Apple. The pieces match up so well, it’s barely even an analogy. The lesson seems clear: unless Apple learns from its past mistakes and opens up its mobile platform, it’s going to end up with a Macintosh-like minority market share while Google licenses its mobile OS to all comers and the Android phone becomes the Windows PC of the new mobile computing era.

Maybe you’ve heard this sentiment expressed before, and maybe you’ve read the inevitable reactions to it from ardent Apple supporters explaining why the current situation is very different and how Apple will succeed this time around—or perhaps how it has already succeeded. I’m on board with the first part; I think the mobile market is very different from the PC market of old. On the second part, Apple’s prospects for success, I’m less sure.

But first things first.

To understand the differences between the war for the PC market and today’s mobile battlefront, consider the specifics of Apple’s historic failure against Microsoft. According to the story, Apple’s refusal to license its OS led to several insurmountable disadvantages.

First and foremost, Apple had to make and sell all the hardware that would run its OS. Microsoft, meanwhile, had an entire industry working to make hardware for its OS. PC makers fought for every last scrap of the market, building hardware to suit all sorts of customers: PCs for home use, education, gaming, point-of-sale, data centers, businesses, industrial use, you name it. In the heat of this competition, PC hardware prices were driven down and margins were cut to the bone; PC hardware was commoditized.

Even when its catalog of Mac products was at its most sprawling, Apple made a comparatively narrow range of products, with just a few half-hearted excursions into less-mainstream niches. It was clear that a single company couldn’t make and support enough different kinds of hardware to serve the entire PC market.

Since the margins on hardware are a lot lower than the margins on software, Apple was at a distinct profit disadvantage versus a software vendor like Microsoft. To compensate for this, Apple tried to stick to the sweet spot of profitability in the hardware market, avoiding the tiny margins of the very low end and the low volumes of the very high end. This further lowered the glass ceiling of Apple’s maximum potential PC market share.

To add insult to injury, Apple wasn’t even on equal footing when it came to hardware costs. While the IBM PC and its eventual clones used Intel CPUs, Apple chose Motorola—twice. The battle between x86-compatible CPU vendors pushed performance higher and prices lower, but Apple was left out of that virtuous cycle, making its Mac hardware more expensive and often slower than its PC competition.

The result was that Microsoft dominated the PC industry, achieving a bona fide monopoly and reaping huge profits, while Apple nearly went out of business.

Pattern recognition gone awry

Now let’s compare this to the contemporary mobile world, starting with the idea that a single company can’t profitably produce a wide enough range of hardware to serve an entire market. While that may have been true for the PC, I don’t think it’s true in the mobile space.

Consider the iPod. Apple started with just one, Mac-only iPod model, refined it for a while, expanded beyond the Mac market by making a Windows version, re-calibrated its aim for the mainstream and released the smaller iPod mini, then iterated confidently while also branching out into less profitable segments. The end result: Apple completely dominated the digital music player market.

Next up is pricing. By allowing hardware vendors to slit each other’s throats, Microsoft ensured that customers would have access to cheap PC hardware while not hurting Microsoft’s own (software-based) profits. At the height of the war for the desktop, PCs weren’t cheaper than Macs by a few dollars; they were cheaper by hundreds, sometimes thousands of dollars. That was a crushing blow to Apple’s sales prospects, and one that a company that made its profits from hardware sales had no way to retaliate against.

iPhone X-Wing

What does mobile phone pricing look like today? Well, the iPhone isn’t much more expensive than comparable phones. And since phones cost a lot less today than PCs did in the ’80s and ’90s, both adjusted for inflation and in absolute values, the differences are even smaller: tens of dollars, not hundreds or thousands. That kind of pricing differential is eminently surmountable with product features and design—an advantage Apple definitely enjoyed back in 2007 and arguably still has some of today.

A big reason for this price parity is that most of the cost of a phone isn’t in the phone itself, but in the contract with the carrier. An iPhone 4 may cost you $200 to buy, but the contract will cost you thousands of dollars.

This doesn’t mean that there’s no room for handset pricing to affect sales, but it does mean that those price wars will take place at a scale and in a realm where Apple has already proven itself able to win: portable consumer electronics that cost a few hundred dollars at most, dropping down to two-digit prices at the low end.

As for hardware costs and performance, Apple’s component suppliers are the market leaders. Even its “unique” ARM-based CPU uses the same instruction set as the CPUs in its competitor’s phones. For now, at least, Apple is on the right hardware train. And if the time ever comes to make a change, Apple is uniquely experienced in switching CPU architectures in a way that’s mostly transparent to customers.

All of this is to say that the situation in the mobile space today is not analogous in a straightforward way to last millennium’s battle for the PC desktop. Now, without using history as a crutch, let’s reconsider Apple’s mobile prospects. Is the iPhone destined to be a minority player in this market, or will it come to dominate? If, as I propose, a single vendor can provide enough hardware diversity to cover most of the market, and if every player has similar hardware costs and roadmaps, what does it take to win this war for our palms? Where’s the edge, and who’s got it?

An idealist might say that having the better product will make the difference. As much as I’d like that to be true, I don’t think any company has a product that is so much better than its competition in the eyes of so many people that quality alone will decide things.

Critical mass is another factor. Are customers buying iPhones because their friends and relatives have iPhones and they want to video chat with them, use some of the applications they’ve seen, or just be part of the in-crowd? In other words, has Apple’s 2007 launch of the iPhone given it insurmountable lead? Again, I have to say no. Apple had a head start, for sure, but Google has closed the gap quickly with Android in terms of both product quality and sales.

Speaking of which, what explains Android’s recent rapid sales growth? Android is a good OS, but then, so was webOS, and look what happened to Palm. Quality is not enough. Android is available on a wide variety of hardware, but a menagerie of form factors has not stopped RIM’s market share slide. Handset variety also poses challenges to application developers who must target a fragmented platform. Hardware is not going to make the difference. So what will?

Carriers, carriers, carriers

Let’s revisit the Mac/PC analogy, with a twist. In the desktop era, distribution wasn’t much of a factor. Everyone had access to the same retailers, and, eventually, the same Internet. Retail margins were all very similar, and exclusive distribution deals were rare and usually inconsequential. Product features and pricing were the most important differentiators, and both were controlled by the hardware manufacturers.

Today’s mobile market is the polar opposite. Distribution is almost completely controlled by the carriers—albeit sometimes indirectly. A lack of decent coverage in a particular geographic area can eliminate a phone from consideration, regardless of how great the hardware is or how much it costs.

Carriers are also running the show on pricing. Carrying the vast majority of the cost of the phone in their contracts means that the carriers have the most leeway to move the market by, for example, lowering monthly bills, lowering or eliminating bandwidth caps, increasing subsidies (thus making phones appear “cheaper” to consumers), and negotiating how much of this money will be shared with phone manufacturers.

And, of course, the carriers decide whether to allow a phone on their network at all.

Distribution isn’t important when all competitors have the same access, but it’s incredibly important when the market is fenced-off into independent kingdoms, the choice of which can make or break a sale before the merits of the actual product are even considered. The way customers have been buying cell phones for the past few decades further minimizes the importance of the phone itself. Most (non-geek) people take a trip down to “the cell phone store,” choose a contract that fits in the budget and maybe includes some discount plan for friends and family, and then pick the handset that looks the best (or the one that’s suggested by the store clerk). Maybe things like ease of use and application availability are considered in that final step, but at that point, they’re not going to make or break the (contract) sale; the customer is walking out of that store with one of the phones that it sells.

Android sales are surging because there’s a pretty good Android phone—probably several, in fact—for sale in nearly every place that sells mobile phones. And as hard as it may be for some of the people reading this to believe, the Apple store is not where most people go to buy a new cell phone. All those Verizon, AT&T, and T-Mobile kiosks in the mall exist for a reason. Apple has 229 retail stores and a big marketing budget, but both are dwarfed by the combined retail presence and advertising spending of the carriers. And yes, I’m including AT&T in all this; AT&T sells Android phones too! It’s Apple on one side and an entire industry on the other…starting to sound familiar?

Leveling the playing field

Apple doesn’t need to license iOS to other handset makers. Yes, Android is starting to look a lot like the Windows of the mobile era, but not because it’s licensed to third parties. The contexts and uses for handheld devices like music players and cell phones are far more limited than for PCs; hardware diversity is not driving Android sales. The magic formula is simple: quality + availability. Android is ascending in the market because it’s good, it’s available where people want to buy it, and it runs on the networks people want to use.

Droid TIEs

The current carrier situation may end up being a transient aberration in the long run, an inefficient market created by the huge fixed costs of building and running a wireless data network. But if the comparatively more mature (wired) telephone, cable television, and Internet service provider markets have taught us anything, it’s that the road to a more competitive marketplace for infrastructure services is a long and hard one. Carrier segmentation will be a fact of life for Apple for the foreseeable future.

There’s only one thing for it. Apple needs to get the iPhone on more carriers as soon as possible. Nowhere is this more important than in the US, where the iPhone is available on just a single carrier—one that’s decidedly not the market leader. The only way for Apple to eliminate the distribution and marketing advantage currently enjoyed by Android is to make sure that everywhere an Android phone is for sale, there’s an iPhone sitting right next to it that will work on the same network. Only then will Apple get a fair shot at selling based on the things it can actually control: the hardware and software of the phone itself. At that point, it can—and should—diversify its iPhone product line just like it did with the iPod in the last decade.

Epilogue: market share matters

On a recent podcast, John Gruber spent some time musing about the inherent worth and actual relevance of market share, noting that “you can’t cash checks with it” and suggesting that it might just be a convenient way for industry observers to “keep score.” It’s true that Apple only needs some reasonable share of the market to sustain its platform. The Mac has had a market share well below 10 percent for decades, and that’s been enough to ensure that developers will still write Mac applications and customers will pay enough for Mac hardware to fund the development of future models.

Furthermore, in the mobile market as in the PC market, Apple’s share of the profits is considerably ahead of its share of the revenues. Analogies to luxury car makers inevitably follow. “Hey, BMW has only 7 percent market share, right?” The idea is that Apple either can be or should be happy with just “the most profitable portion of the market.”

Well, rest assured, BMW is not content with its current share of the automotive market, and Steve Jobs’ Apple will not be satisfied with anything less than the biggest piece of the pie that it can possibly take, in terms of profits, revenues, and unit sales. With the iPod, Apple has proven that all of those numbers can be well above 50 percent—without compromising product quality.

In the mobile market, the goal is the same. Apple is playing to win

Guest Post by John Siracusa. Thanks John!

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What’s to come in 2010

Some thoughts and predictions for 2010:

Computers/OS:

Google’s OS and Google’s Browser Chrome will further erode Microsoft’s OS dominance.

Phones:

Google’s Nexus One is not an iPhone killer but what would be much more powerful and meaningful would be for Google to offer a ‘subsidized’ cell phone service through a carrier in exchange for watching ads – no more cell bills. That MIGHT make me give-up my iPhone habit.

TV/Cable:

TV Everywhere will dominate as cable subscribers will WANT to get what they see at home on their PC’s, phones, etc. They will want this because its only a matter of time before Hulu (and other online content aggregators) lose their premium content or require a subscription fee. (Smell Comcast here?). Boxee, Roku, Sezmi and Zillion TV will have tough sledding IF Apple TV hopefully syncs a (rumored) TV subscription service with their upcoming iTablet/iSlate.  Apple MIGHT offer consumers an a-la-carte menu of the best of cable and network TV on their televisions through the AppleTV box, iphones and the iTablet  (along with several newspaper/magazine subscriptions) for a single monthly fee. Their version of  a cable ‘triple-play’ subscription. Do you remember when cable TV was “sold” as a way to escape the ads on free, OTA broadcast TV? Those were the days…

Movies/Music/Web:

iTunes will announce an iTunes web service, thanks to the Lala acquisition. Disney will move forward with their Keychest initiative and so will the Digital Entertainment Content Ecosystem, or DECE. However, only one system will survive this year to avoid consumer confusion.

‘Live’ streaming video and UGV will replace the jpg /gif as the dominant content format of visual sharing online.

Facebook, Hulu, YouTube , Twitter, and other ‘weapons of mass distraction’ these days will be increasingly ‘filtered’ out from the workplace due to too much time by employees during work hours spent on ‘social media’ causing a huge traffic shift in several social networks most notably, Facebook.

Facebook will go public and the IPO will be a huge financial success until Facebook becomes the Borg unless it allows data portability. Its number of users will continue to climb until the network is as large as Google and people will confuse Facebook with “the Internet” like days of old when the internet was ‘AOL’ to many people.

And then one day…

A new social network will rise to join the big ones. It may offer the privacy that Facebook is moving away from; it may be mobile and location-centric; it may focus on personal content recommendations, but it will come and the minnows will swim like fishes to the next ‘big’ new network to be seen and heard on.

We are all ‘Paparazzi’s’ and ‘Jimmy Olsen’s’ now…with the Advent of ‘live’ broadcasting apps on the iphone and android makes paparazzi’s and Jimmy Olsen’s (instant news ‘scoops’) out of us all further diluting the worth of major news org’s that can’t be expected to be everywhere at all times.

Cloud computing heats up. AWS, Google, Microsoft and others begin price wars to compete for customers.

MySpace will try to become as important to online viewers as MTV was to cable subscribers in the 80’s.

MOG and Spotify will invade the US and give iTunes(lala) and MySpace a run for their money.

And hopefully:

Data portability will become more real, standard, expected and viable. Why isnt’ there a way for me to make 1 Avatar, use 1 password and login to store all this info in a central location that my ‘social networks’ and other internet related service use and fetch each time I access these services?  Here is where I’d place all my photos and videos and then simply choose which services get access to which photos and videos. So, when I leave a social network, my ID and photos and videos LEAVE too.  Go ahead and just try moving or populating another social network again with all of your pictures, comments and videos that you’ve uploaded at one time or another. Hard to do and time consuming beyond belief. It would be nice to able to take MY STUFF (and data preferences) with ME with 1 click.

Comments welcome.

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Google will buy Apple by 2011, Part 2

Many of you had some interesting reactions and comments to this prior post. Thanks for your comments. Let me try and explain why I believe this will happen in one form or another in the next 3-4 years. Many of you have stated that Google can’t afford Apple as the market cap is too big for them to swallow today. True. But it’s not today I am talking about. 3 years on the web is like 21 years on the planet (web years and dog years are nearly equivalent). First, as you know things change rapidly on the net faster than anywhere else. Google MAY be able to grab the rest or nearly 100% of the market share in search over the next 3 years – and that share will increase their value (and market cap) tremendously. To do this, they will not need any hardware, nor will they need to introduce any gadgets/phones, what not. Its 100% software driven. And, given that the web will have an increasing percentage of ‘vertical’ search (vs. the Wal-Mart Google engine of today), Google will also begin to focus its sights on those verticals as well with its huge pile of cash. Google will buy their way into any search vertical they might miss. And that doesn’t take into account non-web advertising like billboards, radio, newspapers and traditional TV +. Now, let’s look at Apple. The market for cell phones is in a state of flux. How many iPhones can one buy? Saturation will occur and sales will eventually have to slow. Competition will appear and market share will s-l-o-w down and decrease over time. When Jobs makes the iPhone carrier-neutral, the walls all come down. So, how do you ‘sell’ more cell phones to people that they don’t need? One possibility is to give them away with advertising. Second, while ‘Goople’ may seem far-fetched to us today, lacing cell phones with ads (think Android) AND perhaps computers with ads or instead of buying an office suite from MS, using GoogleDocs with ads instead to help increase market share over the PC doesn’t seem so far-fetched anymore. Would I choose to use a cell service that gave me a free handset combined with no monthly charges in exchange for watching a few ads? Could I and would I use that combination to replace my land-line eventually thereby sneaking this combination right into everyone homes? Would I choose to get a free laptop that does the same type of thing? I might. Would developing countries whose cultures don’t have the money to buy computers and cell communications use such a computer or cell phone? I bet they would.

The same way Apple introduced their new thin laptop without the traditional bells and whistles of all other laptops sounds so much like what Google did when they introduced Search and Adwords, then slowly but surely introduced itself into other traditional media, while their competitors just scramble around to keep up, and can’t so far. And finally, a merger or some combination of the two is not unthinkable. Both company cultures are similar in so many ways. So, think a new form or type of combination or new venture between the two. Maybe not an outright purchase NOW, but its not impossible in the future.

cloudsss.jpgpie.jpg

Cell Phone Spectrum Auction…Google is in.

UPDATE from my prior post on Nov 16, 2007 on Google’s google-logo.jpg cell phone ambitions:

So 214 bidders have been approved for the forthcoming 700 MHz spectrum auction, which starts on Jan. 24. The big bidders include AT&T, Verizon and Google. These bidders will go after 1,200 licenses.

(click image below to enlarge)

table_bidding_participation_list2.gif

The bidding will conclude on March 24; down payments will be due by April 11. A third of the spectrum is subject to “open access” rules — the winner will have to allow access to the spectrum to any device or application. This part of the spectrum carries a reserve price tag of $4.6 billion.

table_700_mhz_auction.gif

Much thanks to the edit staff at GigaOm for this info. My guess for a winner is still Google -wish they had odds for this in Vegas!

Android Prototype…coming in Feb?

I couldn’t resist – here’s a picture (supposedly) android of the new Android OS (Google phone) on a phone manufactured by HT. Google has taken 2 stands at the Mobile Conference Expo in Barcelona Spain (kicking off Feb. 11th, 2008). Rumor has it they MIGHT announce their new efforts at this conference. The phone looks clunky to me, a bit like my Moto Q and nothing like the cool iPhone, but we’ll have to wait and see. I am sure the OS will be installed in other phones as well.

iPhone for a Christmas present? Not anymore.

I was going to splurge this Christmas and buy myself a ‘jailbreaked’ iphone on eBay. I had it all planned, get the phone, make sure it works ok and then call Sprint and find the lowest cost plan I can possibly get and presto! A new cool iphone, no more cell phone bills and I’m a happy camper. But wait, did I hear AT &T announce last week that they are going to start selling a new, faster iPhone (3G) beginning early next year? Well, that kinda makes the iphone I planned on buying (and I’m sure about another million or so people planned on as well for gifts) already outdated. And I’m sure Apple or AT & T won’t offer an upgrade option.

apple logo

The fact that the CEO of A T & T who has a 5 yr. ‘exclusive’ arrangement to sell iphones made this announcement within one month of Christmas this year was remarkable. Was this by accident he announced this right before Christmas? No, it was no accident – it was done on purpose to ‘kill’ a heck of a lot of iphone sales. But why would A T & T shoot itself in the foot like this?

google logo

Well, here’s one guess: A T & T thought that they had and exclusive from other carriers and, in fact they did under the terms of their agreement, however, they don’t have an exclusive from a yet ‘unnamed’ carrier or what could be a ‘new’ carrier IF Google wins the 700 Mghz spectrum auction bid. So, I think A T & T knows that Google and Apple might team up together and bid on this new spectrum to supply to consumers their own network and cell phones. Therefore, A T & T must now contemplate competing and biding on that auction (or teaming up with someone) to bid to keep everything in ‘check’. How awesome would a new mobile network be with Google owning the network and Apple suppling the phones? Its been speculated that the reason why Apple has been slow to allow VOIP application on the iphone is because they want to be the first company to announce something like this. An announcement to consumers that they can soon make free calls on their iphone using VOIP in exchange for seeing some ads would take a big chunk of the cell phone market away from the mobile carriers. So, why buy an outdated iphone for Christmas? Just wait until the newer, faster model arrives. That’s my plan.

WSJ reports on Google’s gPhone ambitions…

Today, the WSJ had an article on Google’s possible mobile phone plans. Last week on November 10th, I predicted here that Google would buy a wireless spectrum (probably the 700MGHz one up for bids) and if not that one, they’d buy a mobile carrier. Then giveaway the monthly service and minutes in exchange for users seeing or hearing ads – along with an optional ‘pay’ ad-free service. Coupled with their ‘android’ OS announcement, I’m still going to predict this will actually happen in the coming months.

Here is what the Journal’s article said in a nutshell: Google is doing the following right now-

gPhone picture

Developed Android software for mobile phones.

Made Google applications — including email, chat and mapping — available on cellphones.

Sells advertisements for certain Web sites accessed by cellphone.

Enables users to do Web and business searches with cellphone browsers, by text message or with a call.

Is testing an advanced wireless network at Google headquarters.

Operates a free Wi-Fi network in Mountain View, Calif.

Expected to bid for wireless spectrum in a January FCC auction.