Pocket Watch

Apple’s market cap is now about $230B up from about $35B five years ago. That is super impressive performance driven by the release of truly great products, for which Apple deserves hearty congratulations. But Apple’s size will necessitate a change in corporate behaviors, as they’ve moved from Underdog to Goliath status. In particular, Apple will need to be careful to avoid the Bully label.

Look at Apple’s $230B market cap compared with those of the companies around it. IBM (Apple’s Goliath in the 80′s): $170B; Microsoft (Apple’s Goliath in the 90′s and 00′s): $270B; Google: $170B; Nokia: $44B; HTC: $10B. Apple’s a big boy now, and they need to be careful about public perception. A couple of recent happenings could turn against them.

At Apple’s request, there is a police investigation that leads them to breaking down the door of the home of the Gizmodo editor who got the fourth generation iPhone prototype, to take his server, computer, and hard drives (SJ Biz Journal article). Wow. That’s some serious Gestapo-like stuff! That can look cool/gutsy when you’re the Underdog, but as the Goliath, it could really turn into an ugly PR nightmare.

Apple sued HTC (23X smaller market cap) over some UI items earlier this year.  Recall that HTC has had forward facing cameras in many of their phones for a long time, and they’ve got new IP from MSFT, so there may be some potential for IP infringement by Apple, or one of their suppliers, with the upcoming forward facing camera iPhone capabilities. HTC could suck a lot of oxygen out of the room at the fourth generation iPhone announcement in June with a well executed PR/Legal strategy painting HTC as the scrappy innovative underdog and Apple as the abusive IP stealing Goliath. If (to be clear, I’ve got no knowledge as to whether this is possible) the HTC CEO is able to say “We think competition is healthy, but competitors should create their own original technology, not steal ours,” (word for word from Apple Sues HTC press release) Apple might be surprised at how many reporters are ready to take up that cause.

It seems like Apple should proceed with care.  If the Bully label is affixed, it will be very difficult to shake off, and very bad for their brand.

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AdMob released their March 2010 Mobile Metrics Report today.  The Android Catching iPhone trend continues unabated.  In the Android-iPhone two horse race, Android now represents 35% of AdMob ad requests.  And, for the first time ever, Android ad requests exceeded iPhone’s in the US (54% Android, 46% iPhone).  So far, I haven’t seen any changes driven by the pending Google acquisition of AdMob that would lead me to search for a better leading-edge proxy of actual usage than AdMob ad requests.  The next generation iPhone’s video conferencing capabilities may render this analysis moot, but we’ve got at least two or three more months where updating this graph will be relevant.

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Apps as Powerful Word of Mouth Enabler for iPhone User-Evangelists

I witnessed a very common scene in a restaurant the other day: a woman had her iPhone out and was showing off some App to her friend.  It stuck me that this was both a powerful customer acquisition mechanism for Apple, and the creator of powerful incentives for Apple with respect to Apps and App developers.

From Apple’s perspective, the most important role of an App is to induce an existing iPhone user to become an evangelist for the product by showing off the latest greatest coolest funnest App to their friends.  Think of Apps as a customer acquisition enablement tool for Apple.  Given that motive, it is in their interest to have a constant supply of fresh, innovative, interesting eye-candy Apps.  It is NOT in their interest to have a single App stay in the top 25 for weeks on end. It is also NOT in their interest to have some App make its way into the top lists through some other means other than user popularity.  It’s not just that Apple doesn’t care that it is difficult to promote/buy your way in to the top lists, they actively don’t want you to be able to do that.

We need to recognize that the system has been designed by Apple to produce a constant flow of fresh Apps at the top of the list, and build App business models accordingly.

This is consistent with the Apps are to iPhones as Songs are to iPods approach that Apple is taking.

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Congrats to Gizmodo on getting their hands on the next generation iPhone, and getting the good folks at Apple to confirm that it was real.  The most interesting part of the fourth generation iPhone is the front facing camera.   That will bring to the US one of the few areas where the US mobile industry lags other geographies in the world: mobile video conferencing!

Unless Apple tries to own mobile video conferencing for themselves, this will be a boon to the good folks at Skype and the Chinese Mobile Video companies, who I’m sure must have iPhone video conferencing apps in the works.  Although the monetization path isn’t immediately obvious for this, since there isn’t really the equivalent of Skype In/Out opportunity for video.

If you’ve had a mobile video conferencing App rejected by Apple, please let me know, because that will be the most certain indication that Apple is planning to own the category.

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It will be super expensive to develop ads that are both rich and interactive.

Apple announced their iAd mobile ad network in conjunction with iPhone OS 4.0.  It seems that their heart is the right place, but WOW this seems like a problematic implementation.

As always, it is clear that for Apple, Apps are a means to an end (selling high gross margin iPhones and iPod Touches), rather than an end in themselves.   They are trying to make advertising monetization models work better for free Apps, by making the ad experience richer.  Unfortunately, this appears to be a bit of Apple gazing at their own navel and asking “what kind of ads would we want our agency to produce for mobile?”   These seem to create two big challenges:

1. How is Apple going to be able to sell all that Emotion-Filled and Highly-Interactive Ad inventory?  The flip side is who is going to make all those fancy ads?  60% revenue share to the developer is indeed the industry standard rate.  It is fair, IF they can sell most of the inventory (without dropping price).
2. Those are going to be expensive ads to develop.  Sure, for a nationwide Branded advertising campaign (like the kind Apple consumes), this is a tiny fraction of the media buy expense, so it’s not a big fraction of the total costs.  But for the more Direct Response end of the advertising spectrum, the production costs would seem like a challenge.  And the last decade of online advertising has been a relentless march away from the Branding end of the spectrum and toward the Direct Response end, so Apple is fighting against the tide here.

Awesome for developers IF Apple can fill the inventory with High-Emotion, High-Interactivity ads. Otherwise, no different than existing mobile ad networks.

So, it seems likely that Apple will end up with a few beautiful showcase ad campaigns, which have healthy CPMs, to show the world.   But the overwhelming majority of the ads served aren’t likely to be any different than those served by AdMob or Millenial Media or anyone else, which means Apple hasn’t done much to generate incremental revenue for App developers.

I don’t get why they didn’t do something more obviously helpful to those developers of free Apps, like changes to make it easier to do virtual item sales…

May 5, 2010 Update.  It is becoming increasingly clear that Apple is going to make life very difficult for the third-party ad networks.  I guess there is your reason for App makers to bother with iAd: Apple seems to be planning to kneecap the other mobile ad networks.

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Mobile Platform Fragmentation

Last week, Deutsche Bank analysts Jonathon Goldberg and Brian Modoff (excellent analysts, BTW) published an insightful report called “The Big Idea – HTML 5″ exploring fragmentation of mobile platforms and the role of the mobile browsers. The thrust of the report was (simplifying greatly): there is a lot of fragmentation and anarchy in the mobile platform and that was not likely to change quickly; with HTML 5 being the first platform to fix this. And earlier today, the good folks at IMS Research chimed in, saying that fragmentation in the Android OS world causes extra hassle for developers, and that if Google doesn’t manage this carefully, it creates an opportunity for LiMo and Symbian. 

There is definitely a big issue here. The DB guys hit the nail on the head with their implicit understanding that what is required is a handset “platform”; whether it is a mobile OS or a Browser doesn’t really matter all that much to the developer, as long as the developer can do what they need to get done. I must say that the IMS folks lose some street cred by referencing LiMo (LiMo? I can’t think of any serious handset efforts on that one) and Symbian (Symbian? Hello? Even Nokia has given up on that OS). My work with startup companies confirms that it’s taking more and more development time/people to deal with all the Android variants out there. For those coming with a web developer background, this is hugely annoying. For the minority coming from a traditional mobile application development background, they’re still giddy about the fact that their development team size is single digits rather than triple digits. 

I think there is a key observation for entrepreneurs grappling with this fragmentation issue, and that is around what sort of experience you are trying to create with your mobile offering. Of course, there are some applications that require interacting with a specific part of the handset hardware, and there are some that require extracting every ounce of performance possible out of the hardware. For the remaining majority of apps, the idea of trying to match the richness of the current desktop experience (and then complaining about the state of the mobile browsers out there) is probably a mistake. If you’re just trying to port something over from the PC to the mobile, end users will have an expectation of how it is supposed to work, and the fragmentation (Mobile OS platform and/or Mobile Browser platform) issues are going to be really frustrating. But, is “porting something over from the PC to mobile” really going to be where great companies are built in the mobile world? Maybe a few decent companies, but I would argue that the big home runs will come from companies that build their offering from the ground up to take advantage of what is truly mobile. Sometimes that will involve things that can only be done with an app running in the OS, but most of the time, the lowest common denominator smart phone mobile browser is good enough. 

The second reason I am significantly biased toward Mobile Site approach has to do with virality. Many of the truly explosive growth offerings in the Internet world have had a viral customer acquisition mechanism tightly integrated into their primary use case. Obviously, this doesn’t apply to all offerings, and trying to “add virality” as an afterthought is highly unlikely to work. But, if your offering has viral customer acquisition as part of its primary use case, then a key part of making that viral mechanism work well is for a large fraction of the people who receive that viral call to action, to actually be able to act on it! If you sent an email or sms to 1000 people in my address book, what fraction would have an iPhone or an Android device? Maybe 20%? So, 80% of any viral customer acquisition messages coming from me would be wasted if the App only worked on iPhone and Android. What if the we ask the same question instead about what fraction had at least a lowest common denominator mobile browser (even BlackBerry’s awful browser counts)? Maybe 90%? Now, only 10% of those viral invites would be wasted. The Site-based approach is likely to be 4 or 5X “more viral” than an App-based approach. 

For these two reasons, my view is that it is more likely that the first true mobile Killer App will be Site (Browser)-based rather than an App running in the OS.  

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