iCloud/iOS: Apple tightens its platform grip
Digital Entertainment 2.0’s analysis of how Apple’s iCloud, iOS5, and MacOS developments build value and control for Apple’s digital platform, and their consequences on other parts of the digital ecosystem.
Introduction
Apple provided a glimpse into some of the upcoming new features of its key software platforms iOS and MacOS at its WorldWide Developer Conference (WWDC) in June 2011. Also, Apple announced its much anticipated move into providing cloud based services and away from using the PC as the controlling hub.
iOS and MacOS are Apple’s key software assets - the assets which add soul to Apple’s key money spinning devices (iPhone, iPad and Mac). iCloud is the first iteration of the missing third leg - the software that ties all the devices together seamlessly. Together iOS, MacOS and iCloud are both the differentiator for the consumer and the barrier-to-entry for competitors. They are the soul of the Apple overall platform.
For the Digital Entertainment 2.0 team, the main fascination is examining how the Apple platform is evolving and more importantly how new features affect others in the value chain: namely the various distributors including mobile operators, aggregators, content creators and of course end consumers. Nearly every main feature launched seems to support our general theory that Apple is squeezing value from the aggregators and distributors and pushing that value into the device manufacturers (i.e. them).
As Apple only presented the top 10 features of both MacOS and iOS, we present below the top 10 features in the new releases of iOS, MacOS and iCloud, and explain how we think they create value for Apple and their impact on other parts of the digital ecosystem. The rest of this article covers:
Introduction
Apple provided a glimpse into some of the upcoming new features of its key software platforms iOS and MacOS at its WorldWide Developer Conference (WWDC) in June 2011. Also, Apple announced its much anticipated move into providing cloud based services and away from using the PC as the controlling hub.
iOS and MacOS are Apple’s key software assets - the assets which add soul to Apple’s key money spinning devices (iPhone, iPad and Mac). iCloud is the first iteration of the missing third leg - the software that ties all the devices together seamlessly. Together iOS, MacOS and iCloud are both the differentiator for the consumer and the barrier-to-entry for competitors. They are the soul of the Apple overall platform.
For the Digital Entertainment 2.0 team, the main fascination is examining how the Apple platform is evolving and more importantly how new features affect others in the value chain: namely the various distributors including mobile operators, aggregators, content creators and of course end consumers. Nearly every main feature launched seems to support our general theory that Apple is squeezing value from the aggregators and distributors and pushing that value into the device manufacturers (i.e. them).
As Apple only presented the top 10 features of both MacOS and iOS, we present below the top 10 features in the new releases of iOS, MacOS and iCloud, and explain how we think they create value for Apple and their impact on other parts of the digital ecosystem. The rest of this article covers:
- iMessage - killing SMS softly
- iTunes in the Cloud - getting one up on Amazon
- Notifications - Apple robs Windows Phone and Android advantage
- MacOS Software - Apple shuts out other retailers
- Newsstand - Appeasing Publishers (to a degree)
- MobileMe - just ‘making it work’ …and building the moat
- iCloud and Video Services - holding fire for now
- Activation - Cutting the PC cord
- Photo Stream - yes, but why?
- Data Centre Economics - making a start
1. iMessage - killing SMS softly
iMessage, which is the primary mechanism for SMS and MMS features, has been radically reengineered with messages between Apple platform consumers no longer being carried on the mobile network SMS and MMS infrastructure. All of this happens transparently to the consumer and they don’t need to know if their recipients are also using Apple devices - the message routing is determined by the Apple platform.
iMessage is great for consumers as these onnet messages are free, but dreadful for MNOs as they all will probably take a hit on messaging revenues. Apple is competing with the MNO’s core services, and they have even made it easier for consumers to see the value proposition by colouring the bubbles for onnet and offnet messages differently.
Apple has been quite clever in the timing of the release of this feature. Applications such as WhatsApp have already been blamed by some MNOs for declining messaging revenues. Apple effectively is doing nothing differently to them, just improving the consumer experience by making it easier to send and receive offnet messages.
In terms of platform economics, Apple is adding value to the consumer via the device and squeezing value from the mobile network distributors. We believe it is only a matter of time before Apple start offering voice features. This, together with their video conferencing application Facetime, leaves mobile operators staring into the future where they will only be selling data access services.
2. iTunes in the Cloud - getting one up on Amazon
The key value proposition of “iTunes in the Cloud” is that all songs historically purchased through iTunes are available for download to any Apple device at no extra cost wirelessly either through a WiFi or 3G connection as long as the consumer remains within their data tier. The user has control over which songs he wants to download to what devices thus avoiding a situation where all storage on an iPhone or iPad is consumed by a vast collection.
The level of consumer control is such that a consumer can even download a previously purchased album for a specific journey and then remove it after listening to save space. New purchases can immediately downloaded to all devices or selectively as with the case of historical purchases. This feature definitely improves the Apple platform, and especially compared to alternate music retailers such as Amazon.
Currently, Apple users can purchase songs or albums from Amazon and they will be automatically added to iTunes on the laptop, then on synchronization the songs transfer to the iPhone or iPad. Previously, buying songs through the Amazon store on the PC was as simple as buying through the Apple iTunes store, and Amazon has been slowly gaining market share in music downloads, because it competes on price and often offers songs cheaper than in the Apple iTunes store. Now, with “iTunes in the Cloud”, Amazon may still be able to beat Apple iTunes Store on price, but the user experience is now deficient.
We seriously doubt that Apple will allow 3rd party retailers access to their iTunes in the Cloud service, and argue that Apple is using their platform to improve the position of their retail arm compared to 3rd parties.
The other service offered, iTunes Match, also adds incredible value to the platform. Apple has negotiated a deal with the major record labels to offer the opportunity to consumers to add tracks from their collections not purchased via the Apple store to the iTunes in the Cloud service for a cost of $25/year. Reputedly, Apple is sharing this revenue 70:30 with the record labels and as a paid a huge advance of US$100m-US$150m for the USA rights alone. Apple has set the benchmark price for cloud music licensing and has set the bar so high that it is hard to see new entrants having sufficient funding to gain similar licenses. Even Amazon or Google will be questioning whether they can generate enough money from music to justify the price of the licenses.
At the launch event, Steve Jobs presented the use-case of customers who had ripped their physical CDs. The more discussed use-case in the media is those people who have obtained their songs from illegal means, either via P2P networks or friend sharing, who effectively now have a US$25/annum service which legitimizes not only their past behaviour, but potentially also their future behaviour. The third use-case is people who buy cheaper digital music from other digital retailers, e.g. Amazon, and now have an option to pay an ongoing fee to add the simplicity of the iTunes in the Cloud service. Effectively, the usability advantage of the Apple platform is priced at US$25/annum which means this use-case only makes sense to heavy ongoing purchasers of music.
Apple didn’t face the same licensing issue from the publishers and has added a very similar service for all Books bought from the iBookstore with the added feature of bookmarks are synchronized and shared across devices. Overall, Apple has built very compelling cloud services for music, books and magazines and erected larger barriers for its competitors. If iMessage show Apple leveraging interconnected with other networks when it suits them, iTunes and iBookstore show Apple adding features which not only make interconnect more difficult for other companies, but firmly closing previously open doors.
3. Notifications - Apple robs Windows Phone and Android advantage
A notification is the mechanism that consumers are alerted to events - for instance, an incoming email or sms. It is the key mechanism that 3rd party developers communicate with their users - for instance, in a sports application a notification can alert the user that their football team has scored a goal. Apple has completely revamped their notifications user experience with the addition of a notifications centre.
Apple have pushed over 100 billion notifications to iPhone and iPad which presumably partly accounts for the high consumption of signaling capacity which many mobile operators have been complaining about.
It also shows that Apple is quick to address deficiencies in their platform compared to others. This is a key feature of platform economics; you have to invest sometimes to play catch-up. It also highlights the risks for developers of building solutions which address platform weaknesses - yesterday’s successful application is tomorrow inbuilt into the platform.
Interestingly, an alternate notification application was never approved by Apple in their AppStore and instead went into the wilds of only being available on jailbroken iPhones. Apple new notification centre bears a striking resemblance to the non-approved one.
Another example of this approach is with the feature for reminders, where a plethora of applications were already being sold in the Application store. Apple added a feature called Reminders which is part of the initial application load, and which effectively destroys the market for 3rd party applications.
This in some ways looks like a repeat of the Microsoft strategy with Windows and Internet Explorer which got them in such trouble with regulators across the globe.
4. MacOS Software - Apple shuts out other retailers
Apple also made Lion only available from the MacStore as a download. For independent software retailers, such as Amazon, this is a disaster as they no longer will be able to retail the product. Effectively, Apple has firmly closed the door for other distributors and in future will only sell software direct to the consumer. This can only increase Apple margins in the future.
One area of Apple excellence which is rarely mentioned elsewhere is its mastery of the supply chain and with software distribution we have a classic example of how Apple simplifies to improve profitability. Effectively, Apple has now radically cut the cost of production of CDs, product packaging and distribution. For sure, Apple has lowered prices for its operating systems, but at the same time it has radically altered the marginal costs. Apple just has to pay the payment processing fees and very small amount for content delivery - we’d be surprised if they average out much beyond $0.75 for each copy.
Of course, the largest cost element in operating systems is all in the intellectual effort involved in developing them and once released these development costs become a sunk cost as the team moves onto new projects. For new hardware purchases, Apple has bundled the cost of operating system with the hardware sales price.
A corollary effect of the Lion pricing is a potentially huge knock on effect in the Windows dominated PC world. If Apple prices its software so low, then shouldn’t Microsoft also price its Windows operating System similarly? The recent Windows7 retail price is US$120 and available through a plethora of distributors. It will be interesting to see the reaction from Microsoft.
In summary:
Apple has created a new NewsStand application which is the digital equivalent of the street corner vendors of newspapers and magazines. For Newspaper and Magazine publishers, the new NewsStand store seems to add extra value for subscribers from the Apple community. It has been well played out in the media how the major publishers were unhappy with 30% commission that Apple required - and it is not a great strategy to upset Publishers.
The appeasement strategy was twofold:
Overall, the main lesson from this subscription saga is that in platform economics it is vital to be flexible with partners. Appeasement doesn’t necessarily mean conceding on pricing, but can entail adding special features to help them.
6. MobileMe - just ‘making it work’ … and building the moat
The Digital Entertainment 2.0 team is fascinated by the evolution of mail services, because:
One of the ongoing design strategies that Apple uses is simplifying its products and streamlining its internal processes. The net impact is to remove a barrier to adoption and acquisition and improve retention by making one more feature simpler, cheaper and easier to use.
The economics of the new mail service look to be based on customer retention as Apple is adding costs to their platform without any obvious direct or indirect means of monetization. Mail is one of most important features that people use of any connected platform and Mail creates ‘stickiness’ to a platform making it harder for platform users to churn. So, if a consumer has an Apple mail service and wants to move another platform, such as Android or Windows Phone, and that platform doesn’t offer MobileMe features, MobileMe alone could possibly prevent churn. It also helps that MobileMe negates the advantages of the competition.
7. iCloud and Video Services - holding fire for now
Apple announced cloud services for many forms of text, graphics and audio. But the ‘heavy duty’ content form of video was missing. At first glance this might be surprising given that Apple is a major retailer of films and TV through its iTunes store. We think there are four possible reasons for the exclusion of video.
i) Conservatism
After the debacle with MobileMe, the pressure is now on Apple to deliver reliable Cloud services. Video services require far more infrastructure heavy lifting than other forms of content. The size of a 90 minute video is around 4GB, whereas the average album is around 500MB and an average book barely stretches beyond 5MB. Apple may have delayed the release of video cloud services until their infrastructure and capabilities is fully tested with lighter loads.
ii) Network Charges to the end-User
The impact of consumers moving lots of content between Apple devices and the cloud is uncertain, both in terms of data consumption and resulting charges to the consumer. This raises the real possibility that in the era of tiered data plans, Apple consumers could start racking up large overage charges to the mobile operators. We suspect that Apple will want to closely monitor the network consumption patterns, especially the ratio between WiFi and 3G networks, before launching the capability to move the fat video files. The last thing that Apple will want is an increase in the share of their customers’ wallets being passed to the mobile operators.
iii) Competition
The launch of UltraViolet as a consumer proposition is expected in the 2nd half of 2011. This is a big initiative planned by the Movie Studios promoting the ownership of digital copies of movies which has been several years in germination. Apple is the major tech company not included in the consortium. Apple will probably want to see the initial Ultraviolet launch and consumer adoption, before they build their service. After all, Apple is rarely first to market.
iv) Platform Evolution
Successful platforms grow in features year-on-year making them both more attractive to consumers and improving the overall economics. Werner Vogel, Amazon’s CTO, described this process as creating as a ‘flywheel’ of platform economic momentum which makes it harder and harder for competitors to match and creating barriers to entry to new entrants. We have no doubt that video cloud services are on the Apple roadmap and are probably of such importance that they could constitute a major platform upgrade all on their own.
8. Activation - Cutting the PC cord
Apple completely rewrote the book on phone activation when the original iPhone was launched in 2007. Although cumbersome to the consumer compared to traditional phone activation, it offered certain features in return such as the ability to synchronize iTunes collections and automatic backup. But, by far the biggest beneficiary was the Apple platform as they gained a direct relationship with the consumer. Moving on to today and the activation process look even more cumbersome especially compared to the competition.
So to great fanfare and jubilation, Apple announced they were cutting the cord to the PC-based activation (without actually demoing the new activation process). Obviously, if executed correctly, this will eliminate a key competitive disadvantage with iOS, but there is more to the move than at first glance.
i) It Reduces Customer Care cost.
Only about 50% of people ever reconnect their iPhone to the PC after the initial activation process. This means the vast the majority were never completing essential administration tasks such as backing up their phone or updating the underlying operating system with new iOS releases which are not all new features, but also bug fixes. The move of the activation and update process to the Cloud means that a bigger proportion of iPhones will be running the same version of iOS - and this will make Apple support far easier.
ii) Households can substitute PCs with iPads.
Microsoft Windows based PC’s dominate the market share in the home. Apple probably calculates that a certain percentage of home users don’t want a PC in the home and their needs can be met with an iPad alone. Although removing the necessity for a PC will cannibalize some Mac sales these will be replaced with iPad sales, whereas for Microsoft Windows and its OEMs the PC sale is not replaced by alternate revenues. Improving platform economics is all about a series of small steps - either improving the proposition to small micro-segments, such as those people who want to replace their PC, or improving the cost, such as taking tiny fractions off the operating costs.
iii) Reduces Friction in buying new hardware
Apple has also placed the AppStore in the cloud which means all the purchase history of the applications is stored in the cloud - this includes all the settings. This effectively means that swapping to a new iteration of the iPhone or iPad is much easier with all the previous content and setting immediately available for synchronization. As much of the value of the Apple platform resides is selling new hardware removing obstacles for existing users is extremely important.
9. Photo Stream - yes, but why?
Apple also announced a photo distribution cloud service called PhotoStream, which currently has the Digital Entertainment 2.0 team scratching our heads. The main feature is that any picture taken with an iPhone or iPad will be distributed (over WiFi) to all other owned Apple devices. e.g. Laptop or AppleTV. The iPhone and iPad store the last 1,000 photos, the laptop stores all photos and the iCloud stores photos from the last 30 days. So why do we think this new service is strange?
10. Data Centre Economics - making a start
In previous notes, we’ve explained the competitive cost advantage that Google has in its Data Centre infrastructure. Google takes a completely vertically integrated approach from owning the buildings and fibre connecting them to designing the hardware and operating systems that run within them. Recently, Google has even taken the extreme measure of buying its own eco-friendly power generating capabilities.
We don’t believe Apple will be anywhere near Google on its cost curve. First of all, data centre economics is a scale business and currently Apple only operates three datacentres in the US and none in Western Europe or Asia. Secondly, Apple seem to be using third parties for its processing and storage (HP servers and TeraData storage were pictured).
Obviously, this is a start of a long journey for Apple and we imagine years of cost optimization efforts for Apple in improving the unit costs of their data centre operations.
Summary of main platform economics lessons
Platforms need constant investment to continually expand with new features which at a minimum keep up with the competition. These new features continually raise the bar and investment required for new entrants.
Platform owners also need to decide where the doors are allowing interconnection to some services and closing access to others. Platform owners also add features which drive value to their monetization point (in Apple’s case hardware sales) and away from other source in the value chain which create value for others (in Apple’s case aggregators and distributors).
In this respect, Apple is no different from other platform owners, whether Google, Microsoft, Amazon, or Facebook.
iMessage, which is the primary mechanism for SMS and MMS features, has been radically reengineered with messages between Apple platform consumers no longer being carried on the mobile network SMS and MMS infrastructure. All of this happens transparently to the consumer and they don’t need to know if their recipients are also using Apple devices - the message routing is determined by the Apple platform.
iMessage is great for consumers as these onnet messages are free, but dreadful for MNOs as they all will probably take a hit on messaging revenues. Apple is competing with the MNO’s core services, and they have even made it easier for consumers to see the value proposition by colouring the bubbles for onnet and offnet messages differently.
Apple has been quite clever in the timing of the release of this feature. Applications such as WhatsApp have already been blamed by some MNOs for declining messaging revenues. Apple effectively is doing nothing differently to them, just improving the consumer experience by making it easier to send and receive offnet messages.
In terms of platform economics, Apple is adding value to the consumer via the device and squeezing value from the mobile network distributors. We believe it is only a matter of time before Apple start offering voice features. This, together with their video conferencing application Facetime, leaves mobile operators staring into the future where they will only be selling data access services.
2. iTunes in the Cloud - getting one up on Amazon
The key value proposition of “iTunes in the Cloud” is that all songs historically purchased through iTunes are available for download to any Apple device at no extra cost wirelessly either through a WiFi or 3G connection as long as the consumer remains within their data tier. The user has control over which songs he wants to download to what devices thus avoiding a situation where all storage on an iPhone or iPad is consumed by a vast collection.
The level of consumer control is such that a consumer can even download a previously purchased album for a specific journey and then remove it after listening to save space. New purchases can immediately downloaded to all devices or selectively as with the case of historical purchases. This feature definitely improves the Apple platform, and especially compared to alternate music retailers such as Amazon.
Currently, Apple users can purchase songs or albums from Amazon and they will be automatically added to iTunes on the laptop, then on synchronization the songs transfer to the iPhone or iPad. Previously, buying songs through the Amazon store on the PC was as simple as buying through the Apple iTunes store, and Amazon has been slowly gaining market share in music downloads, because it competes on price and often offers songs cheaper than in the Apple iTunes store. Now, with “iTunes in the Cloud”, Amazon may still be able to beat Apple iTunes Store on price, but the user experience is now deficient.
We seriously doubt that Apple will allow 3rd party retailers access to their iTunes in the Cloud service, and argue that Apple is using their platform to improve the position of their retail arm compared to 3rd parties.
The other service offered, iTunes Match, also adds incredible value to the platform. Apple has negotiated a deal with the major record labels to offer the opportunity to consumers to add tracks from their collections not purchased via the Apple store to the iTunes in the Cloud service for a cost of $25/year. Reputedly, Apple is sharing this revenue 70:30 with the record labels and as a paid a huge advance of US$100m-US$150m for the USA rights alone. Apple has set the benchmark price for cloud music licensing and has set the bar so high that it is hard to see new entrants having sufficient funding to gain similar licenses. Even Amazon or Google will be questioning whether they can generate enough money from music to justify the price of the licenses.
At the launch event, Steve Jobs presented the use-case of customers who had ripped their physical CDs. The more discussed use-case in the media is those people who have obtained their songs from illegal means, either via P2P networks or friend sharing, who effectively now have a US$25/annum service which legitimizes not only their past behaviour, but potentially also their future behaviour. The third use-case is people who buy cheaper digital music from other digital retailers, e.g. Amazon, and now have an option to pay an ongoing fee to add the simplicity of the iTunes in the Cloud service. Effectively, the usability advantage of the Apple platform is priced at US$25/annum which means this use-case only makes sense to heavy ongoing purchasers of music.
Apple didn’t face the same licensing issue from the publishers and has added a very similar service for all Books bought from the iBookstore with the added feature of bookmarks are synchronized and shared across devices. Overall, Apple has built very compelling cloud services for music, books and magazines and erected larger barriers for its competitors. If iMessage show Apple leveraging interconnected with other networks when it suits them, iTunes and iBookstore show Apple adding features which not only make interconnect more difficult for other companies, but firmly closing previously open doors.
3. Notifications - Apple robs Windows Phone and Android advantage
A notification is the mechanism that consumers are alerted to events - for instance, an incoming email or sms. It is the key mechanism that 3rd party developers communicate with their users - for instance, in a sports application a notification can alert the user that their football team has scored a goal. Apple has completely revamped their notifications user experience with the addition of a notifications centre. Apple have pushed over 100 billion notifications to iPhone and iPad which presumably partly accounts for the high consumption of signaling capacity which many mobile operators have been complaining about.
It also shows that Apple is quick to address deficiencies in their platform compared to others. This is a key feature of platform economics; you have to invest sometimes to play catch-up. It also highlights the risks for developers of building solutions which address platform weaknesses - yesterday’s successful application is tomorrow inbuilt into the platform.
Interestingly, an alternate notification application was never approved by Apple in their AppStore and instead went into the wilds of only being available on jailbroken iPhones. Apple new notification centre bears a striking resemblance to the non-approved one.
Another example of this approach is with the feature for reminders, where a plethora of applications were already being sold in the Application store. Apple added a feature called Reminders which is part of the initial application load, and which effectively destroys the market for 3rd party applications.
This in some ways looks like a repeat of the Microsoft strategy with Windows and Internet Explorer which got them in such trouble with regulators across the globe.
4. MacOS Software - Apple shuts out other retailers
The price of the new release of MacOS (aka Lion) was announced as $29.99. For the customer this appears as a bargain as previous major MacOS releases were priced at $129 - a huge saving. Basic economics say the lower the price, the higher the demand which is reflected in the price elasticity curve for the product. Apple will know the shape of the curve from the previous minor release, Snow Leopard, which also retailed for $29.99, and therefore will have a good idea of the effect on overall revenues.
Apple also made Lion only available from the MacStore as a download. For independent software retailers, such as Amazon, this is a disaster as they no longer will be able to retail the product. Effectively, Apple has firmly closed the door for other distributors and in future will only sell software direct to the consumer. This can only increase Apple margins in the future.
One area of Apple excellence which is rarely mentioned elsewhere is its mastery of the supply chain and with software distribution we have a classic example of how Apple simplifies to improve profitability. Effectively, Apple has now radically cut the cost of production of CDs, product packaging and distribution. For sure, Apple has lowered prices for its operating systems, but at the same time it has radically altered the marginal costs. Apple just has to pay the payment processing fees and very small amount for content delivery - we’d be surprised if they average out much beyond $0.75 for each copy.
Of course, the largest cost element in operating systems is all in the intellectual effort involved in developing them and once released these development costs become a sunk cost as the team moves onto new projects. For new hardware purchases, Apple has bundled the cost of operating system with the hardware sales price.
A corollary effect of the Lion pricing is a potentially huge knock on effect in the Windows dominated PC world. If Apple prices its software so low, then shouldn’t Microsoft also price its Windows operating System similarly? The recent Windows7 retail price is US$120 and available through a plethora of distributors. It will be interesting to see the reaction from Microsoft.
In summary:
- Apple has added a lot of value to the consumer
- They have squeezed value from the independent software distributors
- They have created pressure on their major OS competitor, Microsoft Windows.
Apple has created a new NewsStand application which is the digital equivalent of the street corner vendors of newspapers and magazines. For Newspaper and Magazine publishers, the new NewsStand store seems to add extra value for subscribers from the Apple community. It has been well played out in the media how the major publishers were unhappy with 30% commission that Apple required - and it is not a great strategy to upset Publishers.
The appeasement strategy was twofold:
- add extra value to Publishers with their own unique space in the NewsStand with automatic background downloads to subscriptions to all consumer devices; and
- not requiring a 30% commission for subscriptions which have been purchased outside of the ecosystem.
Overall, the main lesson from this subscription saga is that in platform economics it is vital to be flexible with partners. Appeasement doesn’t necessarily mean conceding on pricing, but can entail adding special features to help them.
6. MobileMe - just ‘making it work’ … and building the moat
The Digital Entertainment 2.0 team is fascinated by the evolution of mail services, because:- they are usually free to the end-user and therefore open up two-sided business models, such as the funding of Google Gmail by advertisers;
- they are usually costly to operate consuming large quantities of storage, having expensive teams fighting a nuclear arms race with the spammers, dealing with complex identity management issues, and dealing with a lot of governments wanting to pry on the activities of their citizens;
- the mail platforms have subtle modes of interconnect which allow for differentiation with certain add-on features e.g. meeting requests; and
- Telcos gave up the fight many years ago and nowadays leave the services to others.
One of the ongoing design strategies that Apple uses is simplifying its products and streamlining its internal processes. The net impact is to remove a barrier to adoption and acquisition and improve retention by making one more feature simpler, cheaper and easier to use.
The economics of the new mail service look to be based on customer retention as Apple is adding costs to their platform without any obvious direct or indirect means of monetization. Mail is one of most important features that people use of any connected platform and Mail creates ‘stickiness’ to a platform making it harder for platform users to churn. So, if a consumer has an Apple mail service and wants to move another platform, such as Android or Windows Phone, and that platform doesn’t offer MobileMe features, MobileMe alone could possibly prevent churn. It also helps that MobileMe negates the advantages of the competition.
7. iCloud and Video Services - holding fire for now
Apple announced cloud services for many forms of text, graphics and audio. But the ‘heavy duty’ content form of video was missing. At first glance this might be surprising given that Apple is a major retailer of films and TV through its iTunes store. We think there are four possible reasons for the exclusion of video.
i) Conservatism
After the debacle with MobileMe, the pressure is now on Apple to deliver reliable Cloud services. Video services require far more infrastructure heavy lifting than other forms of content. The size of a 90 minute video is around 4GB, whereas the average album is around 500MB and an average book barely stretches beyond 5MB. Apple may have delayed the release of video cloud services until their infrastructure and capabilities is fully tested with lighter loads.
ii) Network Charges to the end-User
The impact of consumers moving lots of content between Apple devices and the cloud is uncertain, both in terms of data consumption and resulting charges to the consumer. This raises the real possibility that in the era of tiered data plans, Apple consumers could start racking up large overage charges to the mobile operators. We suspect that Apple will want to closely monitor the network consumption patterns, especially the ratio between WiFi and 3G networks, before launching the capability to move the fat video files. The last thing that Apple will want is an increase in the share of their customers’ wallets being passed to the mobile operators.
iii) Competition
The launch of UltraViolet as a consumer proposition is expected in the 2nd half of 2011. This is a big initiative planned by the Movie Studios promoting the ownership of digital copies of movies which has been several years in germination. Apple is the major tech company not included in the consortium. Apple will probably want to see the initial Ultraviolet launch and consumer adoption, before they build their service. After all, Apple is rarely first to market.
iv) Platform Evolution
Successful platforms grow in features year-on-year making them both more attractive to consumers and improving the overall economics. Werner Vogel, Amazon’s CTO, described this process as creating as a ‘flywheel’ of platform economic momentum which makes it harder and harder for competitors to match and creating barriers to entry to new entrants. We have no doubt that video cloud services are on the Apple roadmap and are probably of such importance that they could constitute a major platform upgrade all on their own.
8. Activation - Cutting the PC cord
Apple completely rewrote the book on phone activation when the original iPhone was launched in 2007. Although cumbersome to the consumer compared to traditional phone activation, it offered certain features in return such as the ability to synchronize iTunes collections and automatic backup. But, by far the biggest beneficiary was the Apple platform as they gained a direct relationship with the consumer. Moving on to today and the activation process look even more cumbersome especially compared to the competition.
So to great fanfare and jubilation, Apple announced they were cutting the cord to the PC-based activation (without actually demoing the new activation process). Obviously, if executed correctly, this will eliminate a key competitive disadvantage with iOS, but there is more to the move than at first glance.
i) It Reduces Customer Care cost.
Only about 50% of people ever reconnect their iPhone to the PC after the initial activation process. This means the vast the majority were never completing essential administration tasks such as backing up their phone or updating the underlying operating system with new iOS releases which are not all new features, but also bug fixes. The move of the activation and update process to the Cloud means that a bigger proportion of iPhones will be running the same version of iOS - and this will make Apple support far easier.
ii) Households can substitute PCs with iPads.
Microsoft Windows based PC’s dominate the market share in the home. Apple probably calculates that a certain percentage of home users don’t want a PC in the home and their needs can be met with an iPad alone. Although removing the necessity for a PC will cannibalize some Mac sales these will be replaced with iPad sales, whereas for Microsoft Windows and its OEMs the PC sale is not replaced by alternate revenues. Improving platform economics is all about a series of small steps - either improving the proposition to small micro-segments, such as those people who want to replace their PC, or improving the cost, such as taking tiny fractions off the operating costs.
iii) Reduces Friction in buying new hardware
Apple has also placed the AppStore in the cloud which means all the purchase history of the applications is stored in the cloud - this includes all the settings. This effectively means that swapping to a new iteration of the iPhone or iPad is much easier with all the previous content and setting immediately available for synchronization. As much of the value of the Apple platform resides is selling new hardware removing obstacles for existing users is extremely important.
9. Photo Stream - yes, but why?
Apple also announced a photo distribution cloud service called PhotoStream, which currently has the Digital Entertainment 2.0 team scratching our heads. The main feature is that any picture taken with an iPhone or iPad will be distributed (over WiFi) to all other owned Apple devices. e.g. Laptop or AppleTV. The iPhone and iPad store the last 1,000 photos, the laptop stores all photos and the iCloud stores photos from the last 30 days. So why do we think this new service is strange?- Most of the photos the team takes are rubbish and the first attempt is rejected and has to be retaken. So why would Apple want to automatically distribute all photos taken to all devices? The cynics among us think the only rational reason is eat storage and move the day of buying new iPad and IPhone (with larger storage) closer. With a 5 megapixel camera each photo taken with the iPhone4 consumes 2MB, therefore a 1,000 photo library consumes approximates 2GB.
- Acceptable photos are then quite often sent to friends and family. iMessage will perform this task admirably at zero cost if the recipients are also Apple users;
- There is a need to store photos in the cloud, but forever not just for 30 days. These form our digital albums which serve us when we want to relive those magical moments in life. Why would we want these to reside archived on a laptop’s hard drive?
10. Data Centre Economics - making a start
In previous notes, we’ve explained the competitive cost advantage that Google has in its Data Centre infrastructure. Google takes a completely vertically integrated approach from owning the buildings and fibre connecting them to designing the hardware and operating systems that run within them. Recently, Google has even taken the extreme measure of buying its own eco-friendly power generating capabilities.
We don’t believe Apple will be anywhere near Google on its cost curve. First of all, data centre economics is a scale business and currently Apple only operates three datacentres in the US and none in Western Europe or Asia. Secondly, Apple seem to be using third parties for its processing and storage (HP servers and TeraData storage were pictured).
Obviously, this is a start of a long journey for Apple and we imagine years of cost optimization efforts for Apple in improving the unit costs of their data centre operations.
Summary of main platform economics lessons
Platforms need constant investment to continually expand with new features which at a minimum keep up with the competition. These new features continually raise the bar and investment required for new entrants. Platform owners also need to decide where the doors are allowing interconnection to some services and closing access to others. Platform owners also add features which drive value to their monetization point (in Apple’s case hardware sales) and away from other source in the value chain which create value for others (in Apple’s case aggregators and distributors).
In this respect, Apple is no different from other platform owners, whether Google, Microsoft, Amazon, or Facebook.
