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What Happens When Apple's Rules Stop Making Sense

By Chris Maxcer MacNewsWorld ECT News Network
Aug 11, 2011 5:00 AM PT

For some businesses, Apple's App Store rules just don't make business sense.

What Happens When Apple's Rules Stop Making Sense

In fact, in some situations, some businesses that play by Apple's rules can delight their customers and yet end up losing more money than before they even entered the App Store ecosystem.

It all comes down to Apple's 30 percent cut of App Store-based sales and a business' existing customer base.

To reach consumers through the iOS App Store, Apple's basic terms are pretty simple: If an iOS-running Apple customer buys an app, Apple gets 30 percent of the sale price. If the customer buys an add-on product through the app, called an "in-app purchase," Apple also gets a 30 percent cut. In exchange for this 30 percent cut, Apple not only delivers a kick-ass hardware, software, and store experience but also serves up all the data from its data centers and handles all of the e-commerce payment processing.

You would think that running e-commerce from the Web or mobile devices would be easy these days, but it's not. It can be surprisingly painful, especially for new developers and growing businesses. For a guy in a garage with a great idea, these terms -- and opportunity -- are pretty amazing.

But Not for Amazon

The whole process gets a bit gooey fast, though, when an established brand wants to offer its customers an experience anywhere they want it. Amazon, for example, already has millions of happy customers who make regular purchases. Amazon controls their customers' accounts, has credit card data on file, and can easily serve up any media file from their powerful Web servers, including the delivery of e-books for use on the popular Kindle.

Take, for instance, a happy Kindle-using customer who prefers the readability of e-ink and Amazon's brilliant social reading features built into the Kindle experience. Maybe this person is a voracious reader who also happens to have an iPhone. Maybe this reader would like to be able to read an e-book while waiting in some retail line or waiting for a meal to arrive, but packing a Kindle everywhere isn't as easy as packing an iPhone. Sure, the Kindle reading experience might be superior, but the iPhone is more available. So the customer wants an easy iPhone e-book-reading experience while retaining all the benefits of the Kindle experience. Amazon wants to make these customers happy, so it delivers a Kindle app. One problem: the 30 percent cut for in-app purchases.

In this situation, Apple didn't deliver a new customer to Amazon. In fact, Amazon, by providing a Kindle app for iOS, is making the use of the iPhone more pleasant for the customer. Imagine this customer, while waiting for a pizza, finishes an e-book on the iPhone via the Kindle app. Because the e-book is one of series of excellent crime dramas, the consumer decides to buy the next book in the series while waiting in line. Boom -- Amazon just lost a 30 percent cut of the sale to Apple, even if the consumer simply ends up reading 95 percent of the book on a Kindle anyway.

It's not hard to see how this is a losing proposition all around for Amazon, which is one reason why Amazon was directing Kindle app reader traffic to its website when they wanted to find and purchase new e-books. The linking system was a bit clunky, but it let Amazon do a great job of delivering e-book information and letting existing customers use their Amazon accounts to buy e-books.

Apple threw a bucket of ice on that practice, however, by instituting rules that prohibit apps from directly linking to add-ons outside of the app and the App Store retail purchasing engine.

Pain for the Consumer

Now, I happen to have a handful of Kindle titles, and while I'm a happy Amazon customer, I tend to prefer the iBook experience. When I can't find the e-book I want through the iBook app, I go turn to Amazon.com and a Kindle version.

Of course, if Amazon continued to play exactly by Apple's rules, the company would have to be completely stupid. If Apple were driving significant new customers to Amazon, then sure, 30 percent cuts are more than fair. But if Apple is not driving significant new customers to Amazon -- and I've got to imagine that's the case, given Amazon's reach -- Amazon has to find an end-run around the problem.

One answer is using a rich HTML5-based Web app, called the "Kindle Cloud Reader," that can run on the mobile Safari browser so that a customer doesn't have to have a native app at all. From a money transaction standpoint, this enables Amazon to process payments and retain control of its customers. From a consumer standpoint, it means consumers can read their e-books from Kindles, as well as desktop PC browsers (only Safari and Chrome right now). More places to read. Nice. On an iPad or iPhone, you can read your e-books and access your entire Kindle library, as stored in Amazon's cloud, in addition to downloading e-books and storing them in cache on your iPad or iPhone for off-line reading. The good news is, the consumer can click or tap their way to the Kindle store and buy more Kindle e-books from within the Safari Web app.

This is what consumers want to be able to do directly from the superior experience of using a native app, but Apple's rules, combined with straightforward business logic, prevents.

Not Just Amazon

Meanwhile, Wal-Mart's video streaming service Vudu has just announced a new Safari browser-based method for streaming and renting video content. With tight margins in this industry and tons of tough licensing issues, I can't imagine that paying Apple a 30 percent cut would be profitable at all. Still, you can't discount the fact that these businesses are competing directly with similar Apple products. While consumers want choice, Apple has to tend its own business, too. Period.

And yet, what about companies with no competing products? Apple's in-app purchase rules can be particularly bad for specialty and business publishers -- publishers of truly niche content that's priced at a premium for people who work in a particular industry -- say, for example, environmental engineering. While Apple has environmental engineers who use iPhones, the vast majority of these people aren't going to use their iPhone to search and find apps around the business of environmental engineering. No, these people are going to find environmental engineering content from a third-party publisher's website, email newsletters, or magazines. And as readers, they are going to want to be able to extend their content consumption experience on every device.

The problem? When Apple doesn't truly drive the customer to purchase content, the 30 percent cut breaks down fast. This is unfortunate for the Apple-using customer. Instead of being delighted by the ease-of-use their iOS device affords, they either a) don't get access to the things they want, or b) have to jump through hoops to get it.

In many of these situations, an iPhone or iPad is just a conduit ... it's not a catalyst for a sale and it's not a driver of new customers. It's just another window from which a customer wants to view something.

Good News for Consumers

Even if Apple doesn't come up with a better set of terms to reflect these sorts of situations, more and more companies will start developing HTML5-based Web apps that can be used on mobile devices.

Yes, the interfaces won't be as slick as those that can be achieved natively, but consumers will get more direct access to their chosen providers of content or apps. And what's dangerous for Apple? These apps, along with cloud-based storage, are the first big moves in a landslide that will let consumers use Web-based apps on other devices, too -- like Android-based tablets.

MacNewsWorld columnist Chris Maxcer has been writing about the tech industry since the birth of the email newsletter, and he still remembers the clacking Mac keyboards from high school -- Apple's seed-planting strategy at work. While he enjoys elegant gear and sublime tech, there's something to be said for turning it all off -- or most of it -- to go outside. To catch him, take a "firstnamelastname" guess at Gmail.com.

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