App Store Wars: Apple, Amazon, Google, Microsoft & Dynamic Platform Competition

by on March 23, 2011 · 1 comment

Venture capitalist Bill Gurley asked a good question in a Tweet late last night when he was “wondering if Apple’s 30% rake isn’t a foolish act of hubris. Why drive Amazon, Facebook, and others to different platforms?” As most of you know, Gurley is referring to Apple’s announcement in February that it would require a 30% cut of app developers’ revenues if they wanted a place in the Apple App Store.

Indeed, why would Apple be so foolish? Of course, some critics will cry “monopoly!” and claim that Apple’s “act of hubris” was simply a logical move by a platform monopolist to exploit its supposedly dominant position in the mobile OS / app store marketplace.  But what then are we to make of Amazon’s big announcement yesterday that it was jumping in the ring with its new app store for Android? And what are we to make of the fact that Google immediately responded to Apple’s 30% announcement by offering publishers a more reasonable 10%-of-the-cut deal?  And, as Gurley notes, you can’t forget about Facebook. Who knows what they have up their sleeve next.  They’ve denied any interest in marketing their own phone and, at least so far, have not announced any intention to offer a competing app store, but why would they need to? Their platform can integrate apps directly into it!  Oh, and don’t forget that there’s a little company called Microsoft out there still trying to stake its claim to a patch of land in the mobile OS landscape. Oh, and have you visited the HP-Palm development center lately?  Some very interesting things going on there that we shouldn’t ignore.

What these developments illustrate is a point that I have constantly reiterated here: Markets are extremely dynamic, and when markets are built upon code, the pace and nature of change becomes unrelenting and utterly unpredictable. It is often during what some claim is a given sector’s darkest hour that the most exciting things are happening within it. That very much seems to be the case in the mobile OS / app store world. Companies and coders are responding to incentives. With it’s 30% rake, Apple has made what many consider a massive strategic miscalculation with competitors, consumers, and critics alike. In other words, opportunity knocks for innovative alternatives.

But some critics — especially those in the academy– continue to suffer from a “static snapshot” mentality and tend to underplay this dynamic process of market discovery and entrepreneurialism. Far too often, such critics look only at the day’s seeming bad news (like Apple’s 30% announcement) and claim that the sky is falling. In their myopia (and seeming desire to have someone or something intervene to “make things right”) they often fail to follow up and investigate how markets respond to bone-headed moves.  It’s a point I’ve gone to great lengths to make in my battles with Professors Lessig, Zittrain, and Wu. Here’s how I put it in a debate with Lessig two years ago when I was contrasting the “cyber-libertarian” vs. “cyber-collectivst” modes of thinking about these issues:

Cyber-libertarians are not oblivious to the problems Lessig raises regarding “bad code,” or what might even be thought of as “code failures.” In fact, when I wake up each day and scan TechMeme and my RSS reader to peruse the digital news of the day, I am always struck by the countless mini-market failures I am witnessing. I think to myself, for example: “Wow, look at the bone-headed move Facebook just made on privacy! Ugh, look at the silliness Sony is up to with rootkits! Geez, does Google really want to do that?” And so on. There seems to be one such story in the news every day.

But here’s the amazing thing: I usually wake up the next day, fire up my RSS reader again, and find a world almost literally transformed overnight. I see the power of public pressure, press scrutiny, social norms, and innovation by competitors combining to correct the “bad code” or “code failures” of the previous day. OK, so sometimes it takes longer that a day, a week, or a month. And occasionally legal sanctions must enter the picture if the companies or coders did something particularly egregious. But, more often than not, markets evolve and bad code eventually gives way to better code; short-term “market failures” give rise to a world of innovative alternatives.

Thus, at risk of repeating myself, I must underscore the key principles that separate the cyber-libertarian and cyber-collectivist schools of thinking. It comes down to this: The cyber-libertarian believes that “code failures” are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions. Moreover, the decisive advantage of the market-driven approach to correcting code failure comes down to the rapidity and nimbleness of those response(s).

And that’s very much what we’re seeing play out in the mobile OS / app store ecosystem today: Apple’s “foolish act of hubris,” as Gurley calls it, is driving incredible innovation as critics, consumers, and competitors think about how alternative platforms can offer a better experience.  It’s certainly true that none of these competing platforms or app stores have Apple’s reach today. But who cares? The fact that they exist and that innovation continues at such a healthy clip is all that counts.

Cyber-capitalism works, when you let it.

  • Anonymous

    With it’s 30% rake, Apple has made what many consider a massive strategic miscalculation with competitors, consumers, and critics alike. In other words, opportunity knocks for innovative alternatives.

    I suspect Apple believes that they have such a dedicated mass of Apple product customers who will buy their iPads/iPhones that, even with the steep charge, they’ll have a mass of users that app developers won’t be able to ignore.

    I suppose it could backfire on them, but Apple has incredible branding power.

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