One of the benefits of being on the outside of a major multinational corporation is that you can comment on what needs to be done to make more money. You’re unaware of what is currently being worked on, what has been tried and shut down, or what just will not work with the current operational structure of the firm. One of the challenges of a large firm is implementing a new stream of revenue, which has to work across various lines of business, be localized, and be user friendly amongst many verticals. With all that being said, I look at Apple and it’s dominance in the iPod and now the iPhone, and to me, it appears that Apple can be the dominant technology company that everyone assumed Google would become.
Where is Apple now?
Apple is one of the few technology companies that can be in the software and hardware business at the same time. Google is primarily a web-based software company, with 99% of their revenue in the search business. Microsoft is primarily in the software space, with very little revenue being made over the web. Yahoo is a company looking for an identity, but despite everything is a web-based company. The Oracles, BEAs, and RedHats, and OEMs of the world are focused on one part of the value chain, whereas Apple is steadily increasing market share in multiple areas. Apple sells you computers, an operating system and software, and an ecosystem of applications and developers from the increasingly popular iPhone.
Over a billion iPhone apps have been downloaded. There are significant (and increasing) switching costs built on this platform! There is every use case imaginable, and from their recent commercials you can see that they are taking aim at a very potentially lucrative small business vertical. A recent Gartner report showed that Apple’s market share had risen from 5.3% of the smartphone market to 10.8% in the first quarter of 2009. In total unit sales, this is from 1.7 million total sales in the first quarter of 2008, to 3.9 million in the first quarter of 2009. These are staggering numbers considering the state of the U.S. economy in conjunction with the iPhone being restricted simply to a marginal carrier in AT&T, increased competition from competitors (i.e. Blackberry Bold), and limited international expansion. Nokia, the king of the hill in terms of being a cell phone producer, has seen their market share drop at a higher pace than the contraction in demand for cell phones because of the global economy.
Two areas that Apple can maximize revenue: An Apple Payment Gateway and the Amie Street model for the Apple Store.
The Payment Gateway
Recently, Facebook has been testing their own payment gateway for micropayments around their ecosystem of applications. Paypal is one of those companies that really missed the boat to become a massive, game changing company. Owned by eBay, they were more focused on generating revenue to make up for a flatlining (even declining) growth from their core business, auctions. Their Skype acquisition was a failure confirmed on their through a recent Skype charge off, and their StumpleUpon acquisition was a big time failure. So eBay kept raising fees for Paypal to try and smooth earnings to hide strategic business failures in their core business. They essentially priced themselves out of competing in other verticals, and could have made it an easy “build versus buy” decision for companies such as Facebook. It make much more sense to build your own payment gateway than utilizing Paypal and having to hand over the exorbitant fees.
Like Facebook, Apple should absolutely have its own payment gateway. With their apps and developer ecosystem, they could better integrate various payment options for consumers. Developers can play around with various business models, such as reoccurring billing. Although the apps are a guise for selling more handsets, which produces significantly more revenue, this should be a short-term priority. By owning the gateway for these micropayments, they can earn or keep the fees that would have gone to another carrier. Although a billion apps have been downloaded, a majority are free apps, but as developers create more value with apps, these payments will be start to become more material and a long-term billion dollar opportunity. And you never know what other use cases can be created if it’s part of the Apple development toolkit.
Amie Street model for the Apple store
For those that aren’t familiar, Amie Street is one of those innovative companies that are using basic laws of economics to maximize revenue. Essentially, independent musicians post their tracks with a specified minimum price point. Based on the number of paid downloads, the price increases over time and fluctuates basically at the point for a particular demand and price point.
Why would this be important for Apple?
When reading the book The Long Tail, by Chris Anderson, which delves with the Power Law or “80-20” rule, Chris remarks about the fact [his research] that every song on iTunes is downloaded at least once over a year’s span. Recently, Apple has raised the prices of the more popular songs to $1.39 from the usual $0.99 mark for every song, delineating between a hit and an average song. But as I was looking for old music to put on my iPhone, I’d buy substantially more music for my phone if it was at a much lower price point for an old-school song, or a song that only I really liked that very few did. Will I pay 99 cents for it? Absolutely not. But would I at $0.39 or $0.19? I really would. My perception would change instantly.
If you look at the supply and demand curves to illustrate how this would work, it is essentially a shift upwards of the demand curve, with the revenue illustrated by the area below the line.
Essentially you are increasing the market opportunity by capturing the consumer surplus at all areas under the curve with third-degree price discrimination. Different consumer segments are purchasing at their maximum willingness to buy. Those that like getting the song as soon as it comes out are willing to pay a premium for access. Those that wait for the song to be mainstream pay a different price, and the Geoffrey Moore’s “laggards” will buy it after it’s been popular, but at a low price point because the song has lost it’s luster and are late to getting it (like my parents downloading a Kanye West track).
As a result, you are increasing the number of people that can and will download, by enabling them to reveal their preferences and price points, and let the market forces determine the price.
Apple is in the driver’s seat for being the major technology company out there catering to a strong, loyal installed base. It will be interesting to see how important it was for them to own the central platform that will operate our lives for many years to come: our phones.