Tuesday, April 13, 2010

The iPad isn't a computer, it's a distribution channel

"You don't want your phone to be an open platform..." and with that brief statement, Apple justified the closed iPhone and then quickly followed it with the monitored and controlled app store. But Steve, the iPad isn't a phone at all so why not open it up again? If people are concerned about the safety of their apps or need you to protect them from porn, you can do an "app store approved" program or something can't you? And really, do we even need an app store to tell us which apps are good in an era of ubiquitous user feedback and preferential attachment?

The thing is, Jobs' argument was always a bit disingenuous. Closed follows from his brain architecture, not from an argument on behalf of his customers or their network providers. Those are post facto justifications supporting an already-held point of view. And the reason the iPad is going to stay closed isn't because it is good for users, it's because it is good for Apple.

The bottom line is that the iPhone was a relatively open phone and we accepted it, but the iPad is a relatively closed computer, and that's a bummer. Jobs probably believes that he is doing it for the users, finally giving them a post-crank-the-handle-to-start-it experience, but it doesn't take a genius to see how it benefits Apple. Beliefs and self interest usually go hand in hand and here's what I think is really happening...

Microsoft in the 1980s was the perfect business. The kind of business every MBA would like to invent. It had network effects to drive adoption, products with near-zero marginal cost, and a distribution channel that was controlled and constrained enough in the days of the floppy disks in boxes to enforce direct monetization. In short, it had leverage. The kind of leverage that delivers a very steep-sloped relationship between enterprise valuation and market penetration. Or, put the way an economist would put it, the kind of leverage that captures greater than economic rents. We paid more than we had to for Windows and Office during all those years, but at least we can take some comfort in the fact that a big part of it turned out to be an involuntary tithe for Bill's charitable efforts.

The music industry worked the same way. The constrained distribution channel of the vinyl record gave artists and the music companies that distributed their work tremendous leverage, and get them paid for it. Even if a lot of that economic surplus ended up the noses of label executives...

The last decade has been tough on business models like these though. Open Source software is eroding pricing leverage. Digital has unconstrained content delivery and taken away the ability to monetize at the point of distribution. Businesses that had leverage are returning to more linear business models. Plus, companies like Google have figured how to move network effects into the cloud where they are ad supported instead of monetized directly, further eroding our expectation to pay for things. Proprietary software vendors, music industry labels, movie studios, newspapers, etc. all find themselves suffering from their lost control over distribution and the fact that when they lost it they lost their toll booths. Excess rent is hard to come by these days.

In this context the iPad isn't a computing device at all. Jobs is using his knack for design and user experience to build, not a better computer, but a better distribution channel. One that is controlled, constrained, and can re-take distribution as the point of monetization. You aren't buying a computer when you buy an iPad, you are buying a 16GB Walmart store shelf that fits on your lap - complete with all the supplier beat downs, slotting fees, and exclusive deals that go with it - and Apple got you to pay for the building.

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The iPad by itself would be just another physical product living in a nearly linear world. Doubling revenue would require Apple to double the number manufactured; and that would mean roughly doubling labor costs etc. It could be profitable, and there are advantages to building at scale, but not in the greater-than-linear leveraged manner that software or content can deliver. As Apple well knows, a business built on that model builds enterprise value linearly with unit sales. But... the iPad as a distribution channel for fungible goods reasserts the non-linear leverage that Microsoft enjoyed back in the day.

One interesting twist is how the iPad combines network effects and constrained distribution. The bright shiny object design of the iPad leads to network effects at the app store which in turn drives more consumers back to the device itself. Then to the degree that those two forces hold consumers in thrall of the device, Apple can use the device as the point of sale for content worth more than the device itself. The leverage is linked - the first leads to market presence, and then the market presence makes for stronger monetization opportunities in the device-hosted channel.

The other interesting thing is that so many of those "apps" are really just web pages without a URL. Or books packaged as an app. In short, this is content that is abandoning the web to become a monetizable app.

History is never completely new and we've seen things like this happen before. Prior to the 1980's essentially all television was broadcast in the clear. An unconstrained distribution channel like broadcast TV could only be monetized through ad sales, but along came cable with its point-to-point wave guides and surprised consumers were suddenly faced with paying for access. HBO made the content "interesting" enough (i.e. soft porn in your living room), so lots of people did. Even more surprising, before long they were paying for the right to view ads too. In this analogy the Internet and commodity PC are broadcast TV, and the iPad and its app store are HBO over cable.

What happened next in cable is going to happen in computing too though if these device-specific distribution channels accumulate enough power. It wasn't long before HBO and Cinemax were signing exclusive content deals with the studios to lock up content on one network or the other. That left consumers in the odd position of having to pick the network with the studio deal they liked, or pay for both so that they could see any first run movie they were likely to want to see. iPad, Nook, Kindle, ... picture the day when you are sending your kid to school with one of each so that they can get access to all of their MacMillan, Houghton Mifflin Harcourt, and Prentice Hall text books.

Who knows, if Apple's app store gets enough lock-in we may even see exclusive distribution deals on apps. Imagine Pandora strong armed into being only available on iPad/iPhone. That would be a new twist.

Ok, this is beginning to sound like a polemic and that's not really what I set out to do. Let me reel in and focus a bit. The Mac was a commodity platform. Anyone could write applications for it and distribute them in any way they saw fit, from physical packaging in a store to digital distribution online. Or you could just write something yourself and use it. The iPhone seemed a lot like a computer but "for the safety of the network" introduced a constrained software and content distribution channel that imposed checks, and perhaps more importantly, contingencies on a developer's right to distribution (i.e. they can be taken back).

The commodity PC had a good run but now we are finding ourselves in love with task-specific or content-oriented devices like the Kindle and iPad. And while they are attractive for their intended tasks, they come with a cost. They offer us a trade of task-specific design in exchange for important constraints on use and distribution of content. The iPad is essentially a "computer" at the technical level, but one that is intentionally constrained to be a delivery channel for content and applications from or via one company, Apple. You "own" the iPad, but ownership in this case means about as much as owning a television that can only be hooked up to the cable television network that sold it to you would mean. It's a fetishist's Minitel with brushed aluminum and a touch screen.

So where does Google and Android fit in to all of this? Well, it's hard to say. Android may yet win because it has an open platform and seeks leverage only in the old fashion way, the network effect connected to a profitable ad-delivering set of services. If that happens I'll probably write another polemic, slightly tweaked.

At low levels of market penetration maybe none of this matters. After all, we can still buy a laptop and stick Ubuntu on it. But before you decide it doesn't matter at all, ask yourself why there is no Tor client for the iPhone or iPad. Then ask yourself, even if there were one, how hard would it be for a pissed off government to use the many forms of leverage available to them to force Apple to remove it from any device deployed within their borders, or perhaps even within the borders of another country that annoys them.

Even that may be no big deal right now, there are still so many more open-platform personal computers out there. But that is changing and the "content creating" laptop may go the way of the desktop PC, reduced to serving niche developers and content creators, while mobile and task-specific devices (with all of their constraints and beholden to a few large companies with contingent power over anything deployed to them) become the primary way people interact online.

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