iPhone App Store: Business Case Analysis
Since its launch last June, the iPhone App Store has had phenomenal success. Steve Jobs himself, apparently surprised, carefully mentions a business of one billion dollars.
If the scope of this success was not really foreseeable, Apple purposely managed every element that could lead to it.
Let's first briefly explain the iPhone App Store. Software developers are invited to develop applications that iPhone owners can download via iTunes. The developer sets the price for its application, which can even be free.
The business model is quite simple. Developers, after paying Apple a sign-up fee, receive 70% of the revenue generated by their applications. iPhone owners pay for each download (buy and download).
How does Apple protect this business? First, the developer signs a legal agreement. This is not just a confidentiality agreement: by signing it, he releases the Cupertino firm from any liability related to the service provided, he accepts cancellation at will and without motive, and finally gives away the right to develop and exploit competing applications. On top of the legal protection lays the technology: from the developer's kit to the iPhone, everything is proprietary! Finally, and more subtly, Apple controls the relevance of applications with the $99 sign-up fee. This prevents the emergence of sterile applications like the ones proliferating on Facebook. And if this not enough, there is always censorship.
Let's try to isolate the key success factors. Firstly, it did not come out of the blue. Apple reused the iPod + iTunes model and adapted it to the iPhone: instead of buying songs, the user buys applications. In addition, it backed it up with a VC firm which invested one hundred million dollars.
Moreover, Apple remarkably identified stakeholders' needs and created a network of shared interests. It leverages the iPhone owners' passion for their multipurpose handset, as well as the programmers longing to be widely distributed, paid and recognized.
These ties are then cleverly reinforced. This is where the firm's mastery of ergonomics plays a key role. The iPhone owner has many ways to access an application for which the purchase is just a click away. Its price, mostly between 0.99 and a few dollars, promotes spur-of-the-moment purchase. On the other hand, the developer focuses solely on the product development, for which a kit is available, as well as resources and a test bench, and its price: Apple takes care of the two other elements of the marketing mix, promotion and distribution. Ease of use builds up usage.
The other element is the smart business model. The purpose of free (as for the MP3s with the iPod) is well defined: develop turnout and usage, for both the store and the iPhone. This gives meaning, on the developers' side, to the brand policy. Attempts to work around this policy are sanctioned by a $299 sign-up fee for those refusing to be distributed in the App Store.
Obviously there are dark shadows such as the opaque selection and « exclusion » policies, the lack of consistency of applications' ergonomy or the recent security issues. These, however, do not seem to slow down the business success.