Strange to read analysis of Apple that's actually insightful and not a fawning apologia or a wild eyed attack.
On the topic of free apps allowing in-app purchases, I noticed recently that I felt trapped by in-app purchases in games I downloaded for my kid. The apps control the screen and seem, at least on apps aimed at kids, to make it intentionally easy to misclick and purchase something, having tiny, well hidden controls to cancel back out or continue without purchasing or upgrading. Since the only hardware button takes me right back to home I feel trapped like I'm browsing the seedier parts of the web with a pre-popup blocker IE. Not really an "Apple" experience.
Concerning in-app purchases - I hit the same experience with Angry Birds. The text for their in app purchases reads: "Stuck on a tricky level? Out of levels to Play? Bring on the Mighty Eagle!" Not knowing what this was I clicked on the checkmark. Because Eagles are awesome, who wouldn't click on that! Whoops...
I don't understand - all actual purchases go through mandatory, non-customizable Apple UI. There's a "Confirm your In-App Purchase" AlertView, which will also trigger the entry of your iTunes password if you haven't purchased recently. It would be very difficult to misunderstand the purpose of these dialogs. Am I missing something?
You're missing the fact that if you install any app, even a free one, you will be prompted to enter your password. Then for the next 15 minutes you wlll not be prompted again as your child takes the phone to play their new game and racks up thousands of dollars of in-app purchases.
This was a big story not that long ago and prompted an FTC investigation. Apple fixed it in their latest iOS update by prompting for the password every time.
Even for an adult, using the phone alone without a child's fingers prodding randomly at the screen, a popup with an instantly charge my credit card button and a cancel button right next to each other is hardly a peaceful and serene thing to deal with when it pops up unexpectedly as you try to hit the tiny button that you hoped would allow you to avoid this very question. That's why it reminds me of those "You are trying to leave this webpage! OK Cancel" things.
Yes, that's what I said in the second sentence of my second paragraph above. But since you bring it up again I'll point out that this update is not available for my iPhone 3G that I have retired and now use exclusively for kids games. Instead I have to manually sign out after an install.
This is something I had been wondering during the previous arguing around in-app purchase commissions.
Up-front app costs, in-app purchases, in-app subscriptions... they're really all the same thing. You can't charge 30% for one and not for the other... and if you allow folks to transact the purchase outside your ecosystem, you basically get nothing.
With Apple not enforcing the ability to get in-app purchases, the only thing preventing out-of-band sales is the convenience factor. What if someone just set up a fiat currency site where you could go buy credits that would then be accepted by iPhone apps? They could then be sold entirely free, but just require that you sign in with that external account so they can take some of the prepaid credit.
If they've paid out 2 billion to developers, that's 850 million to Apple. Does anyone think they're close to spending 850 million to run the App Store system?
Exactly. I think it's clear they are trying to make more money off the app store, including free apps, but I'm pretty sure they're already making money off of it.
Maybe it is but it bears more analysis than just capitalizing the word 'IS'.
There are a fair number of costs involved:
- Reviewing 350,000 apps x the number of updates. Say 1,000,000 reviews?
- Bandwidth and hosting for all apps, free or not.
- Taxes
- Credit card fees
- Bank fees for payouts
- Data center
- Legal Work for maintaining a store in 91 countries.
- Software development of the store itself.
- Developer support
I'd say that's obviously going to be 100's of millions on costs. 850? who knows, but the net is that it's going to be minor on their balance sheet and not a business they'd bother with if not for the synergy with their hardware business.
They're losing perhaps $100 million to credit card transaction fees. Then, salaries for god knows how many sysadmins, developers, designers, sales/marketing people, app reviewers, accountants, on and on. Assuming that just 5% of its ~30,000 non-retail employees work on the App Store, salaries eat up another $150 million.
So now we're down to $600 million, or so.
Then you've got bandwidth, infrastructure maintenance, scaling costs, utility costs. You've got to pay out cash to developers each month, so now there are banking fees on top of the ones you see when you collect money from consumers.
Still, let's be extremely generous here and pretend that operating at this scale costs nothing at all.
In such a case, operating the App Store made Apple a profit of $60 million a quarter since it opened. Apple's Q4 2010 profits were $4.31 billion, making the App Store in such a scenario worth a whopping 1% of Apple's profits.
In reality, once you account for all the hairy stuff we skipped, it's probably a lot closer to a rounding error than any kind of significant contributor itself.
Everything Apple does drives hardware sales. They're a hardware company. The App Store creates a virtuous cycle that makes their platforms more useful. The point, here, is that they aren't making money from the operation of the store – they're just barely breaking even. Would they operate at a loss to continue improving their device sales? I doubt it. And the crux of this piece is that Apple is doing what it can to keep this monster from turning into a money pit.
Obviously they don't want it to become a money pit, but I still think it only makes sense to consider app store revenues in the big picture of the entire iOS business. I'm sure they'd rather it were profitable but even if the store ran at a reasonable loss it would still be an essential and healthy pillar of their business.
You should also consider how fast the market is growing too. Maybe it's only 1% of Apple's profits, but that's a lot considering it was non-existent 2 years ago. Perhaps in another 2 years it will be 5% of Apple's profit. That's incredible growth into a completely new profit market.
Free apps give you the taste of other paid apps. Everything looks free but there is always some cost behind it. I think app store as a freemium business.
We cannot discount the hardware purchase and the halo effect of the Apple products.
"If Amazon isn't happy with Apple's terms, users can install the Kindle app outside the store"
There is a jailbreak for that and it would defeat the purpose of Appstore i.e. Walled Garden.
That's a very interesting analysis. Apple is breaking even on the App store, and the idea is free apps cost a lot of money to host because of volume distribution costs (as opposed to sunk one-time costs for having the store at all). If we assume this is true, then pay apps are subsidizing the cost of their free competitors.
>Get rid of exclusive distribution, and Apple can be more creative about charging developers who do want to participate in the App Store
I like Manton, but:
1) Exclusive distribution is the wall of the garden. As mobile ascends the garden is richer and more concentrated, drawing more varmints. For most people if their PC doesn't work it's annoying, if your phone doesn't work it's unacceptable.
2)As for Apple being more creative with charges...They certainly can't charge any developers more than 30%, but what about less. He himself points out, you have to be consistent in your fees or everyone will move to the cheapest option.
If Apple is really losing money on the App Store, then maybe they ought to change the model.
Make the yearly developer license cheaper - $50 or $20 or whatever. Then charge another $20 or so every year for each app that you publish. Developers who put out a lot of apps will pay more than those who have the license but have not even released an app yet.
They could come up with a way to charge for every 'major revision' (ie, not a bug-fix update) you push out so that developers who are constantly putting up updates (and thus using more of the reviewer's time) end up paying more.
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[ 4.5 ms ] story [ 56.9 ms ] threadOn the topic of free apps allowing in-app purchases, I noticed recently that I felt trapped by in-app purchases in games I downloaded for my kid. The apps control the screen and seem, at least on apps aimed at kids, to make it intentionally easy to misclick and purchase something, having tiny, well hidden controls to cancel back out or continue without purchasing or upgrading. Since the only hardware button takes me right back to home I feel trapped like I'm browsing the seedier parts of the web with a pre-popup blocker IE. Not really an "Apple" experience.
This was a big story not that long ago and prompted an FTC investigation. Apple fixed it in their latest iOS update by prompting for the password every time.
Even for an adult, using the phone alone without a child's fingers prodding randomly at the screen, a popup with an instantly charge my credit card button and a cancel button right next to each other is hardly a peaceful and serene thing to deal with when it pops up unexpectedly as you try to hit the tiny button that you hoped would allow you to avoid this very question. That's why it reminds me of those "You are trying to leave this webpage! OK Cancel" things.
Up-front app costs, in-app purchases, in-app subscriptions... they're really all the same thing. You can't charge 30% for one and not for the other... and if you allow folks to transact the purchase outside your ecosystem, you basically get nothing.
With Apple not enforcing the ability to get in-app purchases, the only thing preventing out-of-band sales is the convenience factor. What if someone just set up a fiat currency site where you could go buy credits that would then be accepted by iPhone apps? They could then be sold entirely free, but just require that you sign in with that external account so they can take some of the prepaid credit.
My homescreen says differently. I don't get what he's trying to say here.
It IS a profit center.
For reference apple made $6 billion in profit last quarter,. So, no it's not a big profit center.
There are a fair number of costs involved:
- Reviewing 350,000 apps x the number of updates. Say 1,000,000 reviews?
- Bandwidth and hosting for all apps, free or not.
- Taxes
- Credit card fees
- Bank fees for payouts
- Data center
- Legal Work for maintaining a store in 91 countries.
- Software development of the store itself.
- Developer support
I'd say that's obviously going to be 100's of millions on costs. 850? who knows, but the net is that it's going to be minor on their balance sheet and not a business they'd bother with if not for the synergy with their hardware business.
So now we're down to $600 million, or so.
Then you've got bandwidth, infrastructure maintenance, scaling costs, utility costs. You've got to pay out cash to developers each month, so now there are banking fees on top of the ones you see when you collect money from consumers.
Still, let's be extremely generous here and pretend that operating at this scale costs nothing at all.
In such a case, operating the App Store made Apple a profit of $60 million a quarter since it opened. Apple's Q4 2010 profits were $4.31 billion, making the App Store in such a scenario worth a whopping 1% of Apple's profits.
In reality, once you account for all the hairy stuff we skipped, it's probably a lot closer to a rounding error than any kind of significant contributor itself.
seriously though, anyone who suggests excluding free apps would have to be crazy. free users lead to paying users.
>Get rid of exclusive distribution, and Apple can be more creative about charging developers who do want to participate in the App Store
I like Manton, but:
1) Exclusive distribution is the wall of the garden. As mobile ascends the garden is richer and more concentrated, drawing more varmints. For most people if their PC doesn't work it's annoying, if your phone doesn't work it's unacceptable.
2)As for Apple being more creative with charges...They certainly can't charge any developers more than 30%, but what about less. He himself points out, you have to be consistent in your fees or everyone will move to the cheapest option.
Make the yearly developer license cheaper - $50 or $20 or whatever. Then charge another $20 or so every year for each app that you publish. Developers who put out a lot of apps will pay more than those who have the license but have not even released an app yet.
They could come up with a way to charge for every 'major revision' (ie, not a bug-fix update) you push out so that developers who are constantly putting up updates (and thus using more of the reviewer's time) end up paying more.