Thursday, July 28, 2011

Apple/Vendor Lock In/Not For Me

iPad Display ItemImage via WikipediaYesterday I explained why I don't own an iPhone. In the process of doing that I touched on something I want to explore a little bit more.

One of the reasons I cited was Apple's 30% tax on any purchases made by way of an application. If you're selling a magazine or other purely electronic piece of media and you own all the rights to your content that isn't necessarily a bad deal. This is because there are high fixed costs to producing the first copy of an electronic magazine but after that the incremental cost of selling another copy is nearly zero. Note, I'm not an expert on magazine publishing but the two times I sold an article I got a check up front and there was no additional per copy payment. So, if Apple provides  a way to put your product in front of millions of prospective new customers that 30% just might be a very attractive proposition. In cases like this I think Apple is being fair and reasonable as they are providing a potentially lucrative channel and want to be compensated for that.

The case for book publishers isn't quite as clear cut. They still have high fixed costs up front but in most cases they also have to pay royalties to the people who produced the work they are selling. I have no clue what a typical royalty on a book is but it's probably enough money that paying 30% of the gross sale price for a book to Apple is a bit of an unpleasant experience  having a viable alternative to Amazon probably makes that pill easier to swallow. Again, if Apple is charging 30% it's a reasonable deal.

Where we run into problems is when Apple tries to apply that % to companies like Amazon who are selling a wide variety of products including items that are not electronic in nature. Amazon's margin on products of that kind are small and are being squeezed as Amazon attempts to expand in a tough economy. This is easily proven by the fact that they had a 50+% revenue increase year over year in their most recent quarter but saw a drop in profits.

Amazon sells a lot of different things, including Apple products like the iPad. I very much doubt Apple is allowing Amazon a 30% margin on those items.

There was a time when 50% margins were common for retailers. Even before the advent of the world wide web and the consumer friendly increase in competition that it created average margins were in decline. Sam Walton built an empire with Wal-Mart and Sam's Club by squeezing margins down to 5% or less while still making a tidy profit.

So, clearly it's not feasible for companies like Amazon to pay 30% to Apple for most of the stuff they sell.

Obviously Apple isn't stupid. They know this. The fact that they are insisting on imposing this kind of fee tells me that they aren't actually expecting to collect much if any money in this case which means they have a different outcome in mind and it's not one I'm interested in being a part of.

One of the less clever things that most companies do at some point is to try to subtly or not so subtly lock us into using their products or services. Logically enough this is called "Vendor lock in". The reason I describe it as less than clever is that it's basically a coercive approach that works against the interests of a businesses customers. When you work against the interests of your customers those customers eventually get angry and frustrated. When that happens you're in trouble no matter how high you've built the walls around them. The only sustainable method to lock your customers in is to constantly please them. When you depend on any form of coercion you're building a dysfunctional and one sided relationship that will fail eventually.

Apple has established an impressive ecosystem with iTunes and the app store. They make boatloads of money off of their hardware but the hardware is just part of the picture. Apple also wants to sell us stuff. So far they've primarily sold us music and applications but you can be sure they'd like to sell more than just those items.

So, lets assume that Apple would like to sell us anything and everything like Amazon. They might brand such a venture the "iStore". Forcing Amazon and other similar companies out of the Apple ecosystem would reduce/eliminate competition for the iStore. In the short to mid term this would be great for Apple as they would benefit from not having to share their pool of customers for such purchases. They wouldn't even have to take advantage of their monopoly to charge higher prices. Just having 100% of the potential market increases their bottom line.

The long term problem with this approach is that consumers aren't stupid and when you start to depend on building walls around them they eventually become unhappy and look for ways to escape. I tend to be one of the first people out the door in this situation.

Apple used to be the plucky and smart underdog. This is changing. They are dominant in the Tablet space, control a substantial portion of the smart phone market and own the lions share of the revenues there and continue to see growth in their share of the PC market. This kind of success can be tricky for any company to maneuver. If you're publicly traded the problems only compound. Apple's financial performance over the past several years has been amazing and unprecedented. They are under an immense amount of pressure to continue to execute and grow. That kind of pressure can lead companies to do things that aren't always in their or their customers best long term interests. I think Apple's attempts to drive off competition and lock their customers in is an example of that scenario playing out.

All of which explains why I'm off the Apple bandwagon for now. I will not support a company that removes my ability to choose and uses their dominant position to strong arm their competition out of the picture. You win on innovation and quality or you don't win at all in my book.

Apple has consistently been a company that followed the high road in the past but it looks like they are starting to lose their way to me.
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