Individual Action, Collective Power

11 February 2011

The iPhone revolutionised smartphone technology and created a new outlet for developers to create apps. Here, business leaders Mehrdad Baghai and James Quigley retrace the iPhone's meteoric rise and discuss some of the issues surrounding app development.

For technology enthusiasts and gadget lovers, Friday June 29, 2007 was a memorable day. Many waited hours in line; some camped outside for two days. Even Apple CEO, Steve Jobs admitted he had butterflies in his stomach. Why? That Friday signalled the start of Apple's innovative foray into telecommunications: it was the day the iPhone was launched.

Archetype in action

Soon, iPhone mania swept through the US. You simply needed to "tap", "flick" and "pinch." The hefty price tag of $599 didn't deter many. An estimated 270,000 handsets were sold in the first two days alone. One year later, Apple announced the launch of the second generation iPhone 3G. But this time, there were no flashy new features or cool hardware upgrades. Apple needed a new "wow factor," and the Apple App Store was the perfect fix for iPhone neophiliacs. The App Store, a virtual retail mall, opened on July 10, 2008 via an update to Apple's iTunes software. The appeal of the App Store was instantaneous; it generated $1m a day in sales in its first month. As of the middle of 2010, more than 250,000 apps were available for download. The average price was only $2.70, and iPhone owners spent an average of $4.37 per month on new apps. That is the beauty of the App Store - it can transform your handset into a mobile computer. As Apple declares on its website, it has "Apps for Everything."

Behind the storefront are nearly 30,000 developers around the world plugging away at their computers with dreams of making their fortune, while tens of millions of iPhone devotees wait for the next cool app to download. Apple has developed an unrivalled virtual marketplace that brings together consumers and developers to conduct their trade.

Its power has grown to rival and even surpass that of the seemingly omnipotent Google: Apple has begun to enter the mobile advertising market with its launch of iAds and is "[locking] the search giant out of advertising on Apple's devices." Other competitors, such as BlackBerry, Microsoft, and Nokia have tried to emulate the App Store but with limited success. Why? Apple's App Store is more than just a temple for your fabulous phone: it's a tightly controlled ecosystem where Apple willingly shares pieces of its pie with regular Joe developers and enables them to strike it rich.

"The App Store, a virtual retail mall, opened on July 10, 2008 via an update to Apple's iTunes software."

Meet Joe Developer

Ethan Nicholas is a regular guy. He has a one year- old son who keeps him busy in the evenings after work. He really enjoys working at Sun Microsystems as an engineer, and has made quite a name for himself there. In past lives, he's also worked at GeoCities and spent six years with Yahoo! Lacking the money to buy books or take courses, he stays up late at night surfing the Internet and reading countless websites to hone his coding skills.

Over the past six weeks, Ethan thinks he's made a breakthrough in his programming. He's developed a little app called iShoot, an artillery combat game where you get to blow things up using a range of different high-powered weapons. Ethan decides to price it at $2.99, and, soon after, releases a free version. Ten days later, iShoot becomes the number one app on the Apple App Store with 17,000 downloads in one day and steals iFart's crown. That was in January 2009. Now, Ethan Nicholas estimates he's made about $600,000 in one month on iShoot. He never intended to get rich from developing an iPhone app.

Share a piece of your apple pie

Ethan's story isn't common, but more and more developers are achieving similar successes. Fantastical headlines such as "iPhone Developer Quits Day Job After 'iShoot' Hits No. 1" and "iPhone Developers Go from Rags to Riches" are further fuelling developers' dreams. And with one app's success, other benefits follow. Some start their own game publishing firms, for instance. Thousands of programmers have turned the App Store into a living organism that's changing minute-by-minute based on consumers' love of iPhones. Strangely, the App Store's primary aim was not to make money from selling apps.

The original commercial goal was just to do slightly better than break even. Apple allows 70% of revenues from the store to go to the seller of the app, while 30% is retained by Apple for distribution, processing, supporting download capabilities, advertising, and overhead charges. With the store's overwhelming popularity, estimates of Apple revenues in December 2009 exceeded $250m per year. That may sound like a lot, but what's remarkable is that $175m went directly to the developers. More over, a statistic from Steve Jobs' keynote in June 2010 stated that five billion apps had been downloaded and $1bn in revenues shared with developers since the store's launch in 2008. This "fair split" has been extended to the publishing space with the iPad: Apple's deal has forced Amazon to rethink its 50-50 split with the Kindle.

The fact that Apple has been willing to share the success of its store with developers has created an environment that incentivises them toward the same goal. Steve Jobs has declared, "The developers and us [sic] have the same exact interest, which is to get as many apps out in front of as many iPhone users as possible." Developers are driven not only by the financial gain, but also the bragging rights that are associated with developing the number one iPhone app. One owner of a successful app development company stated, "Some kid in his bedroom can literally make a million bucks just by writing a little app." In the first month of the App Store opening, its top 10 sellers made $9m between them. This wouldn't have been possible for independent developers without significant investment. Apple's virtual marketplace enables creativity to flow from developers and into the hands of iPhone enthusiasts.

Are the tides turning?

Like many things that have near-cult status, the App Store comes in for criticism. To some, Apple exploits and manipulates its followers through a cleverly constructed regime: it's both hero and villain. The rules of the game appear simple: access is easy and open. But this creative free-for-all comes at a price. While it's willing to hand out slices of its proverbial pie, Apple controls the rubric for the marketplace. Developers have had to abide by the following rules to get their apps in the App Store:

  • You must only use the Apple platform and programming tools to create App Store apps.
  • You must not use outside services to measure how your applications are performing.
  • You must only use the Apple App Store to distribute your iPhone app. You must neither sell nor give away your iPhone app, except through Apple.
  • If your app is rejected, you must not publish the contents of your Apple rejection notice.
  • If your app is approved, you must not disclose the details of either the development of your app or its approval process.

You must remember that all apps are subject to approval or rejection by Apple; not every app that gets submitted gets sold. There are also restrictions on what apps can and cannot do before they are listed. For apps to be approved, they are not allowed to:

  • duplicate iPhone or iTune functionality;
  • have limited utility (ie, basically do nothing);
  • use offensive language;
  • conflict with Apple branding;
  • infringe on other third-party rights;
  • contain objectionable or sexual content;
  • ridicule public figures; or
  • contain any combination of the above.

TechCrunch writer Jason Kincaid has raised "command-and-control" concerns: "Over the last few days we've been tracking Apple's recent decision to remove all sexual content from the App Store. It's an alarming move on Apple's part, if only because it shows that the company is willing to throw developers (and their livelihoods) under the bus without any notice at all. Now developers are left wondering: just what exactly is allowed on the App Store? As it turns out, the new policy may be even more restrictive than it first appeared." He goes on to say, "As far as we can tell, Apple hasn't spelled out its new policies anywhere (our request for more details has gone unanswered). Keep in mind that these rules may not be set in stone - Apple is purposely vague about its policies, and they're probably still changing." With an ever-lengthening list of rules, Apple flexed its landlord muscles, emphasising that it retained ultimate control over the look and feel, of every single iPhone.

Restrictions were so tight that developers complained that "Apple's continuing ban on all discussion of the iPhone apps software development kit hinders the developers of games and programs tailored for the [iPhone] from collaborating with each other and sharing programming hints and tips. That's slowing development of iPhone programming expertise and might also be having a negative impact on the quality of iPhone applications." Such stringent control means many developers and iPhone owners have been tested. Last year, software developer Molinker was expelled from the store along with its 1,000 apps.

The problem was that Molinker's apps, though poor imitations of existing ones, were getting suspiciously high ratings. The company was essentially bribing individuals (with free copies of the apps) to provide top reviews. In response, Apple purged the store of all of Molinker's applications, saying it was "happy to do whatever it takes to keep its house clean." To some, the action (though justified) smacked of tyranny. It demonstrated "the power that Apple has over those that sell in its exclusive marketplace. Sure, Molinker was caught cheating, and was punished, but Apple could pull the same trick on any developer, for any reason."

Some rogue developers use unauthorised App Stores, such as Cyndia and Installer, to distribute their rejected or banned apps. And some iPhone owners also "jailbreak" their imprisoned handsets by overriding default Apple programming to install prohibited third-party applications. Jailbreaking your iPhone basically gives you full control over your iPhone but, of course, Apple is combating that by creating new operating system (OS) upgrades that will disable your jailbreak. As the complaints pile up, has Apple's sheen begun to fade?

If people want to strike it rich by developing iPhone apps, they really only have one choice, and that's to accept Apple's rules to sell approved apps. From a business perspective, Apple continues to increase its power - in May 2010, the company surpassed Microsoft in terms of market capitalisation, with a value of roughly $222bn - about $3bn ahead of Microsoft. CNET writer Ina Fried states, "The fact that Apple, not Microsoft, is the more valuable franchise represents a remarkable turn of events in the history of computing." And there doesn't appear to be a saturation point to the App Store. By 2011, it's expected to surpass 500,000 apps, with the add rate running at about 500 apps per day. Thus, one of the keys to Apple's App Store success is to keep the developer (tenant) community happy, successful and productive. Within Apple's internal marketplace, its tenants are able openly to compete with each other to develop the next big thing. However, what enables Apple to dominate the market is that it creates both the OS and the hardware, such as the iPhone, iPod, and iPad, and when you combine that with the proprietary app store and iTunes, it delivers the ultimate "Apple" customer experience from beginning to end.

"If people want to strike it rich by developing iPhone apps, they really only have one choice, and that's to accept Apple's rules."

Apple has engaged consumers in a way that no other competitor has. Although it's possible that other app stores like Google's may one day compete from a number-of-apps perspective, BlackBerry owners will probably never have the same adulation for their phones as iPhone owners have for theirs. Steve Jobs has stated - somewhat ironically given Apple's tight grip on the reins of power - that Apple is providing "freedom from programs that steal your private data. Freedom from programs that trash your battery. Freedom from porn. Yep, freedom." And beyond the App Store, Apple's power continues to grow. In just 27 days, sales of the iPad, released in April 2010, hit one million. In addition, in July 2010, quarterly revenues reached record highs of $15.7bn with profits of $3.25bn.

Good news for the tenant developers in the App Store, but not such good news for other companies. It's not just Amazon's Kindle that's under threat: the Flash platform, developed by Adobe for digital media, is banned from Apple's devices. The success of the iPad is forcing publishers to develop iPad specific editions, putting Adobe under great pressure. It will be interesting to watch how Google, Microsoft and others respond.

Excerpted from AS ONE: Individual Action, Collective Power by Mehrdad Baghai and James Quigley by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright (c) Deloitte Global Services Limited, 2011.

Mehrdad Baghai is Managing Director of Alchemy Growth Partners.
James H. Quigley is CEO of Deloitte Touche Tohmatsu Limited.