The App Store is in Trouble Without Paid Upgrades

I want to preface this by saying I am not an app developer, however I have watched the app store and Apple for a long time now.  I have also lead very successful digital marketing teams for billion dollar revenue companies, so I know a thing or two about marketing ad driving revenue for products and services.  

Ever since the app store was introduced in 2008 it has been a boon for many developers, but more and more I hear their revenues are down even though the app store as a whole is up.  I hear a lot of complaints about the app store is geared to only help the top grossing apps or the apps Apple wants to help.  All of this is true, it is hard to find the app you want in the app store and their curation definitely has some favoritism happening, but that's business.  These are problems that still need to be solved, but the biggest problem in my eyes is the lack of paid upgrades.

Being a consumer of apps I have enjoyed the lack of paid upgrades, it allows me to reap the benefits from the app for a long time.  However, I paid for Instapaper 6 years ago and I have not paid a dime since, this is not a good model for the app developers.  I am a loyal customer, but I don't need the upgrades that come with the monthly fee, which I think is spending too much for the extras.

Loyal customers are the best source of additional revenue

For any business to thrive, they have to be able to establish a base of business that provides the bulk of the revenue.  This is the loyal customer base that equates to 70-80% of the revenue, but accounts for only 30-50% of the investment in advertising and marketing.  These are the customers that love the products, tell all their friends about the products and buy new products when available.  This is why Apple is crushing their competition because they have a loyal base of customers that buy new products from Apple when available.

For app developers, without a model for paid upgrades, they are forced into a model of perpetually finding new customers or create a subscription type model.  For game developers this is fine, because they can create an experience that is easier and more enjoyable for the gamer when purchasing extra coins to make getting through levels faster.  People are willing to pay for these and that is great.  For the indie app developer making polished apps, this model does not work.  For that reason, they are constantly trying to find another customer who will buy their app for $2.99 and then forget about them.  This is not a sustainable business model.  Eventually there are not enough customers to buy the new app to make a living.  As more people buy the app, the less people there are to buy the app in the pool, so it is inevitable that revenues will not be maintained.

Beautiful apps will become fewer and far between

The Apple app store is filled with a lot of garbage, but it is also filled with amazing apps.  Apps that developers have put their heart and soul into.  Even back in the days of only the Mac, an application on that platform was much nicer than applications on the PC.  This is a trend that continued on iOS and continues to this day.  But that may all change soon.

A developer has to feel confident they will get a return on their investment for the time they put into an app.  There are never certainties in this business, but someone who takes pride in what they build will always take the time needed to make it beautiful, functional and have the best customer experience possible.  If there is not a business model that seems viable, the developer is then forced to create many apps or develop for multiple platforms to succeed.  This limits their time.  Limited time results in less polished, less amazing apps.  This hurts the app store.  This hurts Apples platform.

Paid Upgrades is a superior app business model

Paid upgrades give the app developer the opportunity to continue to work on their app while making money from current loyal customers and new customers alike.  This is a sustainable business model.  It is also a business model that will create and maintain amazing apps.  So many developers have created great apps and made very good money, only to see the app become less and less updated over time leaving the customer with the same experience they had 5 years ago. 

A paid upgrade model will allow developers to build apps that they want in their heart to build, continue to improve that app, while having a revenue stream that supports the added development work.  This will result in apps that have longer shelf lives.  Imagine if this model existed and Marco Arment was still toying with Instapaper because their was a revenue stream that could sustain the business?  Developers like him and many others would continually improve and push the envelope of what their apps can do.  All this would cost the customer $3.99 a year, or every other year, or whenever the developer decided the upgrades to the app warranted an upgrade?  And if the customer didn't want to upgrade, that's fine, they can stay with an older version.   

I would like to see Apple adopt this model.  I know app developers have been begging for years, but I am an app consumer that is now begging.  I don't want amazing, innovative apps to go away.  I want apps where developers spend many hours toying with the customer experience until it is just right.  Where they obsess over every little detail because they know their most loyal customers will remain loyal because of that obsession.  Where they create the next "pull to refresh" because they know there is a better way.  

I don't want to live within a platform where the developers don't improve upon their original design because it is not worth the effort from a revenue perspective.  Please Apple, just for us app consumers.

Busy is not a Strategy

One of my favorite people once taught me the mantra of "Busy is not a Strategy".  So many businesses use the wrong metrics or KPI’s when measuring success of the business.  For brick and mortar companies, their eyeballs tend to deceive them and they use that as their main metric (we were so busy).  For other industries it is market share.  How many widgets can we sell.  The problem can be using the wrong KPI’s along with having the wrong culture can lead to an unprofitable business.

I have implemented the “Busy is not a Strategy” with resounding success before.  We had a casino/hotel in a declining market that had 1,800 rooms.  They were moderately successful considering their location, but they were using the wrong metrics.  Their KPI’s were hotel occupancy and casino revenues.  Now anyone who knows the casino/hotel business is going to ask, what is wrong with those metrics?  They had good casino revenues for the market and an occupancy of 87%.  Most anyone would love these numbers.  Plus, they were really busy.

When we took over the business strategy of the property we saw to get these impressive numbers, there were a lot of giveaways and very low hotel room rates.  To drive the wrong metrics, they were servicing a large number of unprofitable guests.  The belief was if the hotel is full, more profits would eventually flow to the bottomline.  There was just one problem, the other centers of business were not large profit centers and the customers coming in at very low hotel rates did not gamble, because they didn’t have a lot of money.  

To increase profits, we decided we were not going to busy, we would focus our attention on the best customers and try to drive more frequency from these guests while sacrificing the low-end of the business.  This resulted in decreased occupancy and decreased casino revenues.  Uh oh.  Hotel occupancy went down to 44% and casino revenues were down 10%.  The operators were crying “the business is being ruined”.  Even competitors were coming over and asking the operators “are you going to be able to remain open until the end of the year”.  There was pure panic.  That was until the financials came out.  EBITDA was up 100% for the quarter.

By focusing on the best and most profitable customers, this property saw increases where it mattered most, the bottomline.  How did this happen?  The expenses to drive the KPI’s that were important to this property were astronomical.  They were essentially competing for market share instead of profit.  What happened through time, is the best customers started to come more often as that was the new focus of the property.  Casino revenues started to increase through time to levels much higher than before the strategy change, however occupancy remained at 44%.  They did this by focusing on:

• Increase frequency of their top tier from the players club
• Increase hotel room rate
• Target giveaways to the more profitable sector of the database
• Increase customer satisfaction of the best customers

This is very similar to what I see is happening in the phone industry.  There are many manufacturers and most of them are focusing on “Busy” as a strategy.  Now the metrics for busy in this industry are phones sold and market share.  Android accounts for approximately 80% of the worldwide market share for phones sold.  Yet when it comes to profit, that metric is almost reversed.  In fact it is a lot less than 20% in the last quarter.  So how can this be?

The phone manufacturers are selling basically the same thing.  They run Android software that they manipulate in small ways, but all the apps are compatible with their competitors.  This creates an experience that cannot be differentiated in any way but price.  This is the same thing that happened in the PC industry.  All manufacturers ran the same operating system, Windows, and they had to compete on price which forced them to make deals of adding bloatware onto their machines that destroyed the customer experience.  This is where the phone industry is heading.  When price is the main differentiator, businesses eventually will go out of business unless they can outlast the competition.  

So these OEM’s sell many millions of phones to increase market share which leads to…  To what?  I don’t know.  From what I have read these manufacturers have a decent amount of customers that are buying new phones, but they are buying them for the price.  So the manufacturer sold an unprofitable phone so they can gain a customer who will buy another unprofitable phone.  That doesn't sound like a sustainable strategy.  There is nothing that differentiates the experience of the customer enough to make that return customer more profitable.  It is a vicious cycle.  

The only company that is running a different strategy is Apple.  Apple is making almost all of the profit in the phone industry by having a differentiated product that is customer focused.  Apple is doing the same thing in the PC industry, their Macs account for about 10% of the market, but more than 50% of the profits.  Apple has been able to run the “Busy is not a Strategy” strategy to ultimate success.  Sure Apple sells a lot of phones and they would like to sell more, but these sales are the outcome of their strategy, not the focus.  Apple has a culture that is design focused which leads to a product that has a better customer experience.  

Apple is dominating the phone industry because they do not bow down to the marketshare gods.  They focus on the customer first through their design culture.  They make profitable, differentiated products which bring in the majority of the profits in the industry, which then allows them to spend more money on R&D to create more products and services to keep their customers in the ecosystem.  These customers buy new phones at a nice profit which creates a beautiful cycle.  All because Apple is NOT implementing “Busy as a Strategy” 

Graphic: Android's split personality, 2014 edition

Interesting and true take.  Without that fragmentation, Android would never have the market share it currently has, however that fragmentation makes it very difficult for developers and smartphone manufacturers to thrive in the ecosystem.  

This is exactly what happened in the Windows vs MacOS past.  At the beginning of the "war" the Windows environment had a plethora of people making money.  Developers were making a fortune in software and manufacturers were making very good money in making computers.  Of course Microsoft was making the most money out of all of them.  

However, over time there becomes a race to the bottom.  In the Windows example the developers never felt the hurt as much as the manufacturers because Windows owned the enterprise.  The manufacturers however hardly make any profit.  

The interesting thing to watch in the Android vs iOS "war" will be the long term game.  The smartphone wars are very young and already all the manufacturers have gone straight to the bottom.  Since this "war" doesn't have high-end enterprise dominance, developers are not making more money on the marketshare winner, they are making more money on the profitshare winner.  

So even though the marketshare won the day in the previous "war", we are not seeing the same behavior in this war, so over time I believe the fragmentation will hurt Android.  That's why Google is going with the Android L philosophy moving forward, which I think is a necessity for long-term survival.  

Microsoft's Bad Bet

Microsoft bet the company on an operating system that had a market share under 5%.  Why would they do such a thing?  Because the bloggers told them to.  But did they listen to what they wanted to hear or did they truly believe this was finally the time to change the paradigm of Windows that had been basically the same since 1995?

When Windows Phone 7 came out with the now defunct Metro monicker, the blogs went crazy.  "Microsoft has out designed Apple," they cried.  Microsoft was riding high in the blogs and with the tech pundits, probably a first for them.  So can you blame them for being so excited?  We are finally cooler than Apple, lets run with this!  Time to change Windows.

The blog was going crazy because it was different.  It had its own voice.  The tech pundits had been waiting for something new.  Android, WebOS and Blackberry OS's had done little but copy the spirit of iOS, yet here were these tiles that had live data, so different.

But there was just one problem.  Consumers weren't jumping to the new platform.  Even though Microsoft was spending millions of dollars to advertise the new platform, customers didn't have a connection with the platform.  They had a high defection rate compared with iOS and even Android and even though they dominated the enterprise, Windows Phone had little to no penetration in this cash cow segment.  

So it shouldn't be a surprise that Microsoft is now backpedalling on its Metro bet.  The next version of Windows is going to launch into the old desktop of Windows 7 by default, which relegates Metro as no more than the dashboards section of OSX.  So Microsoft will have to figure out their next steps.  Are they going to fork the OS's and create a true tablet OS (like they did with RT) or are they going to try and make their all in one solution with Windows 7 being the default?  I would say they need to brush off RT and make the phone and tablet more compatible, similar to iOS,    

Windows 8 and the Cost of Complexity

The WSJ – and prevailing wisdom – blames two factors for the decline of PCs: PCs have become “good enough,” lengthening the replacement cycle, and more and more time is being spent on tablets and other appliance-like devices.

However, I don’t think these factors are independent; it’s not just that tablets occupy more of a user’s time, but that by doing so they make any performance issues on one’s PC less pressing simply because you use it less. To put it another way, users are likely to have a higher standard for their primary computing device than they are a secondary one; as PCs become secondary devices for more and more people the standard for “good enough” becomes lower and lower.

Ben Thompson has been on a kick as of late talking about his Chromebook, but I believe he hits the nail on the head with the title of the article.  However I have to disagree with his statements above.  I don't believe it's that PC's are good enough because they are now secondary devices, I believe most people were using their computers to do things that are better served in the tablet form-factor.  

People have been using computers to do email, browse the web, go to Facebook.  Most people who owned computers were not using them up to their full capabilities and didn't need all the complexity that is inherent in a PC Operating System, Mac or Windows.  Most people just want to be able to do a few things on a computer and it has to be very easy.  While I am very computer literate, I love my iPad because it is totally simple.  I enjoy the simplicity because I just don't have the time to tinker.  So the iPad model solves problems for all levels of users.  

The downturn in the PC industry is simply because a technology (product) came out that made it easier to do what users wanted to do.  If the iPad was more complex (like Android or a Chromebook), we would not have seen this downturn in PC sales.  

The Macalope Weekly: Hard lessons to learn | Macworld

“Android tablet revenue surpasses iPad for the first time (but not the last)” (No link, but tip o’ the antlers to … well, John Koetsier!)

Profit is a trailing indicator. And in the big picture, the overwhelming tide is to Android, in device diversity, in device quantity, in usage, in sales volume, in revenue.

This is a very interesting take on profit, especially in the tech industry, especially in hardware.  The times where hardware vendors have had a dominant position in market share, they have all either gone out of business or the businesses have been destroyed.  

To say profit is a trailing indicator is an insane comment.  The only way to keep a competitive advantage in hardware is to make a profit.  To gain market share usually comes at the expense of profit and is short lived.  R&D, customer service and quality of product are all things that suffer under the weight of large market share.  The only sustainable business model is consistent profits.  Sounds a lot lille Apple. 

Long Term Strategies vs. Short Term Market Share

Android users are not as active and engaged with online activities as iOS users are. And when companies from start-ups to established players decide which platforms to target with their apps, their web services, and their marketing campaigns, they’re going to go where the eyeballs are. If you follow where the money should be going, it should be focused on Apple.

Which creates a virtuous circle of engagement. People develop their tools for iOS because iOS users are more engaged and easier to monetise.

There is definitely a difference between Android and iOS users.  This brings up interesting points when talking about different business strategies.  When having products, engagement and return loyalty are things that create a sustainable business.  Samsung is selling a plethora of products and in volume, however if the customers are not engaging in the platform and are purchasing items through the Google Play store, Samsung has nothing to hold onto customers when their contracts come up.

This is similar to what we saw with the PC industry.  Because the platform was owned by Microsoft and all the programs and files could easily be switched from machine to machine, the manufacturers had nothing to compete with.  So when there is no differentiation, businesses compete on price and volume.  When that happens everyone loses except the consumer.  However, the consumers gain is only short lived because the products they are buying are becoming cheaper and cheaper and over time they last a lot shorter than the products they purchased before.  

I believe this is what we will see pan out in the cell phone space outside of the US.  Also, you have already seen this in the tablet space.  Because no one can compete with the iPad on a product and experience level, the market has already taken a nose-dive in pricing to gain market share.  The problem with this is the experience delivered to the customer.  These companies are taking a short term gain and will be losing these customers when they are ready to buy again because their experience is subpar.  

This will be fun to watch.  Hopefully we will see much more innovation in the years to come, instead of just relying on Android as a competing platform and everyone racing to the bottom on price. 

Platform updates and the rate of innovation

the really interesting thing is that there are now 200m people using iOS7, where last year 'only' 100m people upgraded to iOS6 in the opening weekend.

Apple is truly playing a different game then anyone in the mobile space.  Google has done a herculean effort to own the platform race from a market share perspective, but Apple just keeps moving everyone forward with new technology.  Looking around at all the people around me, most not technical, upgrading their OS's to the latest version.  That is amazing.  You never saw this in the past and Apple is moving hundreds of millions onto new platforms in a week.  Tough to keep up. 

http://ben-evans.com/benedictevans/2013/9/23/platform-updates-and-the-rate-of-innovation