Apple The Storekeeper

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If you’re the owner of a general store in a small town of 83 people at some corner of a goldenrod state, you’d know the name of every man, woman and child there, where they live and when, where and what they shop. As far as marketing is concerned in that sleepy Nebraskan town, you’re God.

Now imagine a company that sells 50 million home mortgages all over the world. That naturally comes with very valuable financial background information on buyers that can be leveraged for additional products and services, where permitted.

And imagine further that this company not only has mortgage-related financial data, but can actually track furniture, clothing, electronics, food, financial, entertainment and pretty much any other kind of product or service purchased by all 50 million home owners in real time. Also consider that no other company has remotely the same access to such information. Finally, imagine that the company gets a 30% cut on all purchased items by all 50 million home owners. In anybody’s marketing world, this company would indeed be considered transcendent.

Welcome to Apple’s World

One of the jewels in the upcoming iPhone OS 3.0 SDK:

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Of course, those fixated on the rear-view mirror are reliably unimpressed: “Apple has made no more than $20-45m in revenue from the app store.”

This, however, is the same App Store that offers third party developers such features as:

Flexible payments.

In app purchase gives you the flexibility to support a variety of business models. You can offer your customers additional services and content within your paid app.

For example, you can create a subscription magazine app where you ask for payment on a monthly, yearly or periodic basis of your choice. Sell extra levels to extend the experience of your game. Build a general-purpose city travel guide app and let your customers pick the city guides they want to purchase. This new capability opens up many new business opportunities.

You create the app, we’ll bring the cash register.

The new Store Kit framework provides the functionality to process payments via the iTunes Store. You submit items to the store and set their price. When a customer chooses to purchase an item, your app creates a payment request and sends it to the iTunes Store for processing. After the iTunes Store verifies and approves the payment, your app is notified so that it can provide features or additional content.

Familiar business terms.

In app purchase uses the same business terms used for apps sold on the App Store. You receive 70% of the purchase price of each item you sell within your app, paid to you on a monthly basis—no credit card fees apply.

At the rate of projected growth, Apple will amass about 50 million iPhone and iPod touch users within a year. Unlike any other mobile device vendor in the world, the vast majority of offerings in Apple’s App Store will work identically on all its devices. For Apple’s ecosystem partners, that’s one OS, one market, one store and one transaction model aligned with one company, around just a couple of nearly identical devices.

It’s not your father’s business model

While other vendors are just now realizing that when they were busy haphazardly cramming specs and features into low-margin hardware, Apple has been laying the foundations of a moat strategy around its mobile platform.

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Combined with the Push Notification service, Apple’s In App Purchase gives the company a level of visibility into customer behavior, purchase patterns, social networks and dynamics of mobile marketplace that’s unprecedented in the technology business.

Imagine 50 million users with credit card purchase history: apps they buy; how long and how often they use them; what they purchase within the apps; what personal connections they make; what email/text and app notifications they get, and how often and where; what traffic patterns emerge at what times; what applications are crying to be developed; what’s a good time to introduce products and services; what price levels are sustainable; what happens when prices are increased or lowered; and myriad other analytical insights that any CEO with half a brain would happily sign a “$20-45m” check for with his own blood. And that includes Google CEO Eric Schmidt and, when he wakes up from his consumer-markets induced coma, Microsoft CEO Steve Ballmer.

It’s a metadata universe

Apple has had a taste of large-scale customer data mining with the iTunes Store for audio and video products. But that’s a more limited, less lucrative domain of pre-packaged, static content. The App Store offers applications, which are far more open-ended in their commercial scope. Most apps can upgrade, connect to other apps and services, offer in-app purchases and leverage the ecosystem. With the App Store, in addition to its 30% cut from every transaction, Apple gains something else equally valuable: insight.

Insight breeds systems design intelligence, which is the core of Apple’s competency. Needless to say, not all transactional data will be available to or retainable by Apple due to privacy and regulatory reasons. But even a peek at aggregated metadata (without personal identification) would give Apple an enormous and unique advantage.

With the possible exception of Google, no other vendor is currently playing for the same stakes in the mobile arena: not Nokia, not RIM, not Microsoft, not any of the Asian manufacturers and not Sun’s daydream, Vector Java App Store. Google is keenly aware of the power of data analytics, but Android will, by its open-source nature, remain fragmented over many different vendors, business models and competing corporate goals.

It’s not publicly known if Apple has put in place the necessary infrastructure to gather, retain and analyze such massive metadata and has the brainpower to mine for insights, but as the mobile market separates along device peddlers vs. platform vendors, it’s once again Apple’s war to lose.

14 thoughts on “Apple The Storekeeper

  1. Pingback: Organizing self-organizing demand

  2. After using the iTunes Genius Bar for a while, it dawned on me that the classic Sci Fi idea of a network somehow gaining consciousness one day out of the blue is an unlikely evolutionary path of machine mind. Here is the real application of A.I. – the continuous utilization of metadata feedbacked to the gathering program itself to refine even more precise consumer pattern and UI design, in a practical way, not some theoretical project in universities or MSFT Research. Whereas Google attempts to organize the Web, Apple strives to understand people. Apple has the exact training set to train its products – something other companies either do not possess or do not comprehend. Scary exactly.

  3. There are indications that indeed Apple does understand the value of metadata and does intend to use it for greater purposes in the future.

    Apple is good for rolling out services and features (like iTunes Genius) which at first glance appear to be inane, but almost always are serving as test balloons for some greater future use. The most extreme example of this is AppleTV. Because Apple is sitting on so much money, they can afford to float this “hobby” while waiting on other aspects home entertainment industry to shake out. When the direction becomes clear, they will already have a product in place to which they can add new features or alter in a way that allows it to instantly become a hot product.

    Another example is the voice communication feature on the iPod Shuffle. I wouldn’t doubt if the whole thing about making the Shuffle smaller than a stick of gum is some kind of big running joke within Apple, like the SNL sketch. No, the whole objective is to work the kinks out of the voice technology so that they can use it for more important things – namely, accessibility features for Mac, iPhone/iPod Touch, and other new products on the horizon. While tech whiners are complaining about the new Shuffle not being up to the task of serving as the hub of their digital lifestyles (!?!?!), Apple is making bigger plans.

    • Great points. Apple has so far been a unique success with micropayments at scale. If they can grow this even further with metadata analytics, it’ll be scary.

    • Scary indeed. In fact, I believe that Microsoft sees where this is leading, and they don’t have a way to stop it – it’s the perfect explanation for the seeming desperation inherent in their recent ad campaigns.

  4. Having MANY revenue streams, if you can manage it, is the key for a tech company. Certainly, owning both Office, and Windows, has kept MSFT highly profitable in spite of the fact nothing good can be said about either franchise.

    • Remember, MSFT has very few actually profitable business lines besides Office and Windows. As far as we know, AAPL has virtually no unprofitable businesses.

  5. Everyone else has been trying to milk the “phone” part of cell phones, i.e. absurd charges for ringtones, texting, extra minutes, etc. whereas Apple is milking all the products around cell phones, i.e. new apps, music, tv shows, made for iPhone peripheral licensing, etc.

    Apple is enabling lots of people to make money. The telcos wanted to keep it all for themselves.

  6. Good insight. I’d add that Microsoft (and AOL and Yahoo) wanted to be the “gatekeeper” on the Web. All the cellular carriers wanted to be the keeper for phones on their network. But Apple now is in position to pull it off. Thank you, AT&T.

    But there will be pushback to giving transactions (and a cut) to Apple. The Kindle app and Amazon will be an early test case. Apple will have to manage this — and they really need to beef up developer support and communication.

    • There was initial pushback on the subject of Apple’s cut. The pushback faded because people who are familiar with web business understand that 30% is a pretty good deal to handle all of the overhead that goes with selling online, and 0% is even better (if your app is free). Other similar types of online stores charge as much as 50%. When others began to realize this, the whining went away.

  7. I think Apple is very aware of the power the metadata. I tried iTunes’ Genius and I have been very impressed, I no longer create my own playlists, I cannot beat the system. I think Apple knows this and I am sure they are working on ways to extend this into Apps and they will mine the data and from it create new products that will blow the competition away.

    Amazing article again!

  8. Once again, great insight. Apple doesn’t need to sell as many iPhones as possible. Every iPhone creates multiple transactions into the future, not just at the time of delivery. It’s so blatantly business savvy, I’m not sure what the other phone makers are doing these days. All they want is to sell a phone, with no thought of what a person might want to do with that phone down the road. It’s things like this that sets Apple apart. They think things through. They will dominate the smart phone market, maybe not in phone sales, but in revenue, which ultimately what counts. Brilliant.

  9. Nice writeup. However, implying that this is sometime new at Apple is naive. It has been in place for years. The reality distortion field is a cloak which hides it.

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