The iPhone, the Angry Bird and the Pink Elephant

Will Post-PC battles lead to a war of attrition for developers?

pink elephantI am firm believer that he who wins the hearts and minds of developers wins the platform game.

Case in point, in today’s mobile/Post-PC universe, we see clearly how major companies like Microsoft, HP, Dell, RIM and Nokia are struggling to remain relevant in the face of developer apathy.

Meanwhile, Apple and Google have left the competition in the dust by virtue of their tremendous success in courting application developers.

But, there is a “pink elephant” in the room that no one is really discussing, and it gets to the nut of what investing time and energy in a software platform is all about. More on that in a minute.

First, some table setting. As an apps developer, I care about three things. First and foremost, is having a great platform to develop on top of.

After all, great software is a by-product of: A) Enabling your target audience to achieve a well-defined set of outcomes; B) Solving the right problem, technically speaking; and C) Delivering an engaging user experience.

Simply put, if you are working on the wrong canvas, or using an inferior palette, accomplishing these tasks is hard to do. The good news here is that whether you’re a devotee of Apple’s iOS, Google’s Android, third-party frameworks like Ansca’s Corona, or open web approaches like HTML5, the getting’s actually pretty good in this realm.

The second requirement is having a readily addressable, targetable base of users. All things being equal, this is preferably a large base of users, but ultimately, the metric of audience size is less integral than factoring the lifecycle value (in dollars) that you can reasonably hope to capture from the base of your users that you actually do monetize. Again, 200 million iOS devices, and 100 million Android devices is a very large footprint for targeting purposes, so no complaints there either.

This brings me to my third requirement. As a developer, while I am of course very passionate about what I build, I am not doing this for the dark joys of being a starving artist.

Rather, I am in it to make money; namely, to build upon my profession, and if all goes well, sing and dance all the way to the bank. Here’s where the circumstances are cloudy at best, and deeply troubling at worst.

Thinking about success: What’s past is prologue

vintage pcWhen I close my eyes and think back to the days of old PC, I can recall legions of very large, breakout successes that emanated from the PC model (i.e., $100M+ revenue companies).

The high profile names include companies like Intuit, Lotus, Adobe, Symantec, Borland, CheckPoint, McAfee, Siebel and Sybase. But trust me, the landscape was dotted with successes across a dizzying array of application categories and vertical segments, and serviced by a wide range of solution providers.

Similarly, when I think about the dotcom phase of the web, companies like Amazon, eBay, Yahoo, Google and PayPal come easily to mind.

Even the post-dotcom phase of the web is spotlighted by monster successes like, Facebook and LinkedIn, with Facebook being doubly noteworthy for having already spawned a true cash-generating machine goliath off of its platform, in Zynga, which is expected to reach $1.8 billion in revenue, and $630 million in profits in 2011.

Angry BirdNow, contrast these companies with their “breakout success” counterparts on iOS and Android, and you are left with the chirping sounds of crickets.

Shockingly, lost in the stunning growth of iPhone, iPad, iPod Touch and Android-derived devices — 300 million devices sold combined and counting, 600,000-plus apps built, and more than 18 billion app downloads — is the disconcerting truth that no one is talking about. Namely, that the closest story of financial success that we have to Facebook, Amazon or Intuit is … Angry Birds!

What the frak? Angry Birds is ridiculously addictive, it’s cute and it’s brilliantly executed, but it is perhaps a $15-25 million business.

Is this the best that we can do in painting a picture of software success in an industry that is projected to grow to 10 billion devices worldwide?

Cry me a river: Why should Apple or Google care?

I trust that Apple CEO Steve Jobs felt tremendous pride when he announced at WWDC that Apple had paid app developers more than $2.5 billion in revenue share from sales of their applications.

He should be proud. Apple has created an amazing platform that seemingly overnight, but actually a decade in the making, has achieved the disruption trifecta: first re-jiggering the music business, then mobile, and now, the PC industry.

But, I’d like to submit an uncomfortable truth that should give the chess players at Apple (and to a lesser extent, Google) some cause for pause.

As Amazon first began to prove out back in the mid-’90s, creating a discovery engine, distribution platform and marketplace optimized for long tail-oriented product offerings can create great financial rewards for the platform creator, and no doubt Apple has innovated upon this model incredibly well vis-á-vis iTunes and the App Store.

However, whereas Amazon’s model did not completely re-write the economics of selling electronics, toys and books, such that what once sold for $25 is now $0.99, the App Store is fundamentally different. Its sole purpose seems designed to create surplus, so as to commoditize software, and since the incremental cost of each piece of software is effectively zero, the race to the bottom is almost assured in this environment.

This is ironic because Apple’s own highly disciplined business strategy is geared toward maximizing profit margins, without leaving pricing overhang for the competition to attack them from the low-end (which is what happened to Apple during the PC era).

Yet strangely, for all of the brilliant creation, orchestration and curation efforts that Apple has made on behalf of developers, little attention seems to have been made to ensuring that app makers can actually build profitable, scalable businesses.

Thus, it’s noteworthy that in Amazon’s nascent Android App Store, the company is exerting a measure of pricing control over app developers, presumably to avoid this race to the bottom.

Why is this? Perhaps, unlike Apple and Google, Amazon is in the business of making the lion’s share of its money selling other people’s stuff. Silly as it sounds, Amazon actually needs its vendors to be fiscally healthy enough so Amazon can sell lots of their products. By contrast, Apple just needs a steady supply of “there’s an app for that” chum to keep the platform fresh and exciting.

Lest one wax poetic about Google saving the day, remember that their real customer is the carrier and device OEM, and the lion’s share of their dollars are derived from search advertising, so they merely need the “optics” of app diversity to remain relevant.

(Sidebar: If you watch Apple’s TV commercials for iPhone/iPad and mobile carriers’ ads for Android phones, this qualitative distinction becomes clear.)

Netting it out, the current state of affairs raises the following questions:

  1. How is a large software industry going to grow around this type of model, and what happens if it doesn’t?
  2. From an economic viability perspective, what would the ideal platform approach look like for developers?
  3. How might another platform, such as Amazon’s, or Facebook’s rumored Project Spartan, outflank Apple and Google by building a better mousetrap for developers to make money?

A final thought: Once upon a time, the notion that people would even pay for software was scoffed at. But Microsoft, acting purely out of enlightened self-interest, helped catalyze a packaged software industry that would grow to more than $200 billion in annual revenues.

The moral of the story? What’s past is prologue in distinguishing between mere survival and breakout success. How do I know this? A little birdy told me.


tags: , , , ,