Why The iTunes/App Store Model Will Ultimately Fail

This post has a mind-blowing Update at the end.

I’ve argued earlier that Apple must turn iTunes into a platform.

Apple would make more money that way. Because the margins on charging businesses for goods (server hardware, merchant platform software) and services (maintenance, consulting) is much higher than those for consumer goods and services.

Also, it would propagate the Apple Method of sales throughout the Internet, making it a universal standard. And I do mean “universal” — as a platform vendor, Apple wouldn’t care what was being sold. Merchants could sell items for Android and webOS. Apple still collects its money no matter what. (And think of that money being based not only on a flat fee but also including a small — say 1-3% — fee for each transaction. As shown by Switzerland, neutrality pays.)

Why the current in-house all-by-Apple iTunes Store/App Store model will fail is a simple matter of business. It’s the missing link I never thought of, brought to my attention today by @KatMeyer on Twitter.

The current Store model separates sellers from their customers.

There is no way for any business to know who has bought something. Apple keeps that data.

There is no way for a business to find out what someone has bought when more than one item is being offered. In other words, did someone buy only A — or A and B? Apple keeps that data.

There is no way for a business to ascertain if its customer base is a bunch of one-off fluke sales or hard-core repeat buyers — the “true fans” that form the foundations of business. Apple keeps that data.

What sellers wind up with when Apple sends them a statement is a sales figure and a check.

If you’re selling X, Y, and Z, you don’t know if there are any overlaps between those who bought each one of those things. There could be 100% overlap. There could be 0% overlap. This is an important thing to know because it’s the basis of product marketing.

Without the fine-grained customer information that a seller gets from direct sales, a seller is left blind. There’s no possibility of true marketing. There’s no way to determine where marketing should be emphasized. There’s no way to tell if current sales are a fluke or indicative of any kind of trend.

Who can run a business blind like that?

No one.

Although I’m certain it’s part of Apple’s Ultimate Strategy to turn iTunes into a platform, I think well before that happens we’ll be reading accounts in the Me-Too Media from iTunes Store/App Store sellers venting about how they can’t do any strategic planning due to the current set-up.

This will especially start to happen as the Big Six book publishers come on board. They will quickly agitate for the kind of customer information that’s necessary to keep themselves in business.

iTunes Store as a universal merchant platform? Yep. I believe it’s coming.

I just hope it gets here faster than it took the iSlate iPad.

Update, February 1, 2010. Go read this post: Subscriptions are the New BLACK. (+ why Facebook, Google, & Apple will own your wallet by 2015) Briefly: iTunes ID as a universal purchasing ID. That is what will make the Apple Merchant Platform possible. You can sign in using one iTunes ID and buy at any store running on the Apple Merchant Platform. This is the Missing Link. This is also why Steve Jobs showed this slide (twenty seconds in, this YouTube video clip):

That is how Apple gets its per-transaction fee (as I mentioned above, but didn’t make the connection to an iTunes ID as universal ID).

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35 Responses to Why The iTunes/App Store Model Will Ultimately Fail

  1. The current app store model, with Apple as intermediary, is no different than brick & mortar retail or Amazon.com, that’s why the ability to sell direct-to-consumer is so critical for publishers.

    On the magazine side, smart publishers don’t just give away subscriptions to maintain an advertising base, they place a value on the content, and by doing so, develop an invaluable database of engaged customers. They also sell other products besides the magazine; Harvard Business Review is a great example of that, as is Writer’s Digest.

    I did a series of articles on this for Folio last year: http://bit.ly/1MJd7t

    Publishers jumping in bed Apple because they might offer better terms than Amazon is simply going from the frying pan to the fryer. Any move that continues to place a barrier between them and readers is a #fail.

  2. Most publishers don’t have direct relationships with the ultimate customers anyway (using retailers as an intermediary), but regardless I don’t see how the App Store isn’t already exactly the platform you’re describing. It’s true that Apple doesn’t share customer information (which to me as a customer is a *good* thing), but they also certainly don’t prevent anyone from asking for that information. Many of my apps know exactly who I am (and often where I am) because I told them. One of my favorite examples of pitch-perfect use of the iPhone’s capabilities to augment a physical goods business is Chipotle — that app knows who I am, where I am, what I like to eat, and my credit card number. And it uses that information to make my life easier. Showtimes, FourSquare, Mint, FlightTrack, Amazon.com, OpenTable — I use all of these apps regularly, and they know things about me that Apple had no role in sharing with them, beyond enabling the platform.

    There are also ways of gathering user information directly from the apps by embedding software in the app to gather it. See http://www.flurry.com for the most notable example.

  3. Jim Glidewell says:

    While the data you mention is certainly useful, it is by no means universally available. The publishing industry has been selling books through book stores, where such info was not collected nor passed back to the publishers, for hundreds of years. The same is true for all products sold at retail. It seems absurd to claim that this data is now somehow essential.

    Would providing such data be a useful service? Sure.

    Would the vendors be willing to pay for this data? Less sure.

  4. kevin says:

    Do book publishers get that kind of customer data from Amazon, B&N, Borders, Wal-Mart, etc.? Do music publishers get that kind of data from Amazon, Wal-Mart, and other retail outlets? Even more broadly, do consumer electronics and appliance manufacturers get that kind of data from the retailers?

    Most of these insert all kinds of cards (warranty, registration, accessory sales, etc) in what they sell. Don’t they do that simply to find out the demographics of the people they are selling to?

  5. mikecane says:

    @Andrew @Jim @Kevin See what Guy Commented. What will be happening with digital books and Apple is different than past bookselling. The distributor is being cut out. This puts publishers closer to their readers. See the NYT Magazine piece about James Patterson this weekend. He understands what is needed to market a book — and it’s hard to argue with his results (even if you don’t like his work). And maybe if publishers had bothered to gather that information for the past 10-20 years, they’d be in better shape than they are. (OTOH, one can argue it didn’t help newspapers much!)

  6. @mike — I think the distribution function will become even *more* important. It’s one thing to publish into a single channel, but an author (or publisher) seeking to maximize sales needs to be active in multiple channels (App Store, Kindle, and Android Market are all significant and growing sales channels), which means navigating contracts (often with minimal negotiating leverage) and technology partnerships to understand format, device, and software constraints and options.

    Aggregating authors for retailers and retailers for authors is becoming harder and more important, not less so. For example, an author who wanted their content in all of the places O’Reilly sells theirs would need to establish dozens and dozens of discrete relationships (even when excluding print). Just publishing to Kindle or just to iPhone (or even just to both of those) would cut out a very large part of the potential market. Current royalties and relationships may well change, but that aggregation role is here to stay, irrespective of who ends up doing it.

    The only way the distribution function (again I’m not making any assumptions about who performs it) goes away is if there’s a single dominant channel, and neither Apple nor Amazon is anywhere near that level of dominance (especially when you consider the rest of the world outside of North America).

    • mikecane says:

      Were you the O’Reilly guy I Blocked at Twitter? Email me for an UNBlock.

      You are missing the larger point that the Ginormo App Store model is destined to FAIL. One WalMart cannot dominate the online landscape anymore than a real-world WalMart can drive out all other stores.

      As current eBook Babel formats collapse to one *digital book* format, the work required for an indie writer to create a work many people can buy also collapses. Having to sign contracts with multiple online retailers — based on an Apple Platform — is the least of worries. It would in fact be beneficial to everyone. Does WalMart carry all books? No. There will be retailers who will specialize in aggregating specific audiences — just as there are now book publishers who do that — and will market to them far more efficiently and profitably than a Ginormo App Store ever could.

      Just as biodiversity ensures survival of the planet, seller diversity preserves free enterprise. Apple understands that its current position of dominance was a temporary necessity and is unsustainable for everyone — especially for Apple.

      • James Katt says:

        Sorry, but you have just used WalMart as an analogy to the Apple iTune’s Store. This completely negates your argument that the iTune’s model will fail.

        Rather, the iTunes store will succeed and be dominant precisely because it will be like WalMart. In fact, it has already become larger than WalMart as the purveyor of music in the U.S.

        Yes, there will be other stores. Just as there are competitors to WalMart, there will be competitors to the iTunes store. But the iTunes store, like Walmart, is a juggernaut. Nothing can knock it out.

        It will NOT fail because it makes buying things so easy for the customer. You can buy from the iTunes store at any time, any where with only a few clicks on the iPhone you carry with you everywhere everytime. The iTunes store is LITERALLY WITH THE CUSTOMER AT ALL TIMES. There is no other store that can compare.

  7. kevin says:

    As Apple has shown through its Apple retail store, every manufacturer/publisher should want to have a relationship with a customer. But as history has shown, most manufacturers/publishers have been a failure at going direct to customers; that’s why retailers still have businesses. Retail just isn’t as easy as it seems; ask Circuit City, Blockbuster, Tower Records, etc.

    If they want that customer relationship, they can establish stores and expertise at retailing, just like Apple did in both brick-n-mortar and online; the Internet offers a great opportunity for them to do so. But if they don’t want to invest in that, then they need to pay the retailers and distributors for it. And if they don’t want to pay, they don’t get the relationship or the data. (Now I’m not saying that Apple is willing to sell them the data; I don’t know if they would or not at any price.)

    The iTunes model will fail when publishers do so, or if other retailers cave. I don’t see Amazon or Walmart caving just yet.

    • mikecane says:

      The iTunes model is already FAILing. Just ask sellers how the hell they can attract attention to their products without being able to target the audiences interested in them. What happens when there’s a half million “apps” or a million? It’s unsustainable as a going venture for everyone involved.

      • Kevin says:

        How many products does amazon.com carry? How the hell do those sellers attract attention to their products without being able to target the audiences interested in them? Is amazon.com FAILING?

        I would never say the current App Store is ideal for selling digital goods, but it’s not much different from retailing as it is currently done.

        • mikecane says:

          Aside from music and eBooks, Amazon sells primarily physical goods. For such goods, Amazon is just like any other department store.

          • kevin says:

            How does selling physical goods make it any different?

            Regardless of what you’re selling, you’d want to know who was buying your product. As evidence, Apple’s retail store has done wonders for Apple. But unless you invest in retailing (including direct-to-consumer), you’re going to be dependent on middlemen who may or may not give you customer data. This applies to both physical and digital goods. Those middlemen fail only if you sell it yourself, or find someone else who will sell it for you while giving you the data.

      • Victor says:

        I have designed applications for various platforms. The only information that publishers in this business need is the information that the users will bring to them willingly (i.e. by coming to the site of their product or company to discuss it) and in terms of publicity – word of mouth and specialized reviews here and there surpass any mode of advertising. I know simple games that have made well over 15 million in revenue without any any investment in publicity. iTunes and the App store will not fail for as long as they are the easiest and most well known place to get what you need at a reasonable price.

  8. [...] the iTunes store model doomed to failure? This article believes so. Its hard to believe that the momentum it has will [...]

  9. [...] This post was mentioned on Twitter by Guy L. Gonzalez, Mike Cane and Kat Meyer, John Curran. John Curran said: RT @mikecane: NEW POST: Why The iTunes/App Store Model Will Ultimately Fail http://tinyurl.com/yz5cyg9 @jafurtado @ScottMcKain @lefsetz … [...]

  10. AdamC says:

    I believe it is not important to establish a direct link to the consumers, the more important fact is that a product sells.

    And in the case of multiple products an upgrade is enough for the developer to know how well ihst product is being received.

    There is more than one way to skin a cat (hope I got this right) and a direct link to the buyer is not necessary besides there is not guarantee that he will be buying the next app.

    • mikecane says:

      >>>I believe it is not important to establish a direct link to the consumers, the more important fact is that a product sells.

      Wrong. You are swimming against the tide here.

  11. studentrights says:

    Its already a platform for music & movies. Building it out to support your competitors does much sense when the store drives your hardware sales.

    As usually, someone who doesn’t understand how Apple operates. The point of the iTunes Music Store is to sell iPods no to make a profit. The point of the App Store is to sell iPhones and Touches not to make a profit. Hardware is where Apple makes it profit.

    • mikecane says:

      And Apple understands the future in a way you do not.

      • Jim Glidewell says:

        If Apple understands the future so well, why do you claim that their model will FAIL?

        What constitutes failure?

        The fact that certain app and content providers are grousing? The fact that Apple will have incredible leverage over publishers? Or what?

        I make no grand predictions about what Apple may or may not do in the future. Their strategy may evolve, they will probably never completely take over the publishing industry, but I am fairly sure they will not “fail.”

  12. James Katt says:

    App developers know exactly now much of their software sells. This data is available to them at any time through the iTunes App store. Realize that when Apple opened the App store, it inadvertently showed the sales data of every app through iTunes. This was quickly hidden to avoid embarrassing the more slow moving app developers.

    App developers can even force users to activate apps before they are useable. This way, the developers can know how many of their apps have reached customers.

    The iTunes App Store model will prevail because of one very huge reason: It allows ANYONE to sell their apps through iTunes. This includes every high school developer, every mom-and-pop developers, every garage developer. This gives every small developer a HUGE MARKET to sell to, with customers WILLING AND ABLE to BUY BUY BUY. There is no market like the iTunes App store. This is why it will ultimately win.

    When you look at the competitors, there is nothing as easy to develop for and there is nothing with as large a customer base to sell to. This is the huge strength of Apple. Even Google’s Android can’t compete because the Android market is being fractioned quickly into multiple smaller and incompatible markets with different hardware and different versions of the Android OS. This kills the possibility of Android developing into a behemoth like Apple’s App Store.

    The iTunes store is also the only online store which is MULTI-PLATFORM. You can buy from the store using a PC, a Mac, and the iPhone. And SOON, you can buy from the Apple iPad. Competitors limit from what platform they can purchase their music, video, and apps. etc.

  13. Al says:

    Apple’s iTunes created a massive market for digital music where there was no digital music market to speak of.

    Apple’s App Store created a massive market for cell phone apps where there was no cell phone app market to speak of.

    It’s hard to see Apple not being incredibly successful in creating a massive market for digital books, digital magazines and digital newspapers.

    If you are faced with an incredible increase in digital sales, it’s hard to complain about a lack of connection with the buyers.

    Apple provides these services, not to make a profit selling digital goods, but to sell Apple hardware, iPods, iPhones and iSlates or iTablets, that uses these digital goods.

    Apple is not a software company, a retail outlet or a internet marketer of digital goods, software and hardware. Apple is a hardware manufacturer. Apple builds an ecosystem around it’s products just to sell the hardware.

  14. Yacko says:

    “Without the fine-grained customer information that a seller gets from direct sales, a seller is left blind. There’s no possibility of true marketing. There’s no way to determine where marketing should be emphasized. There’s no way to tell if current sales are a fluke or indicative of any kind of trend.”

    Uh, if you haven’t noticed, Apple announced back on Tuesday, March 17, 2009:

    “iPhone OS 3.0 will offer developers the option of selling subscriptions, extra levels, e-books, or other content from within their applications using a new service called In-App Purchase. The service will utilize the iTunes Store for transactions, including payment and authentication, and Apple will take 30% of the proceeds as an operations fee, as it does for normal paid applications sold through the App Store.”

    On Thursday, Oct 15, 2009:

    “Apple has just sent out a letter to developers introducing in-app purchasing for free apps.”

    A publisher could easily have key info reported back on each transaction.

    There is also Flurry, an in-app analytics service. You embed Flurry code in your app, subscribe, and Flurry tattles everything about the user to you, like device, OS, other apps installed, how long you play games, et al.

  15. stefn says:

    Respectfully, Mike, I disagree with your statement that no business can work blind. Most businesses work blind to who buys what. Not that info isn’t good.

    I do like the idea of revamping iTunes in the ways you note. Call it The Apple Cart. It already is a platform. A great publishing platform. It’s success is what makes it vulnerable to criticism. It’s not scaling up fast enough. Who could?

    Sidenote: Mike, you are working too hard. And so am I. Can’t keep coming back to read your responses to comments. Instead of responding to each comment, why not do a “Readers respond” update to your articles and post it? Just comment on what you learned from reader comments and clarify misunderstandings. Great way to redeploy and enhance your content.

    • mikecane says:

      I’ve already hit the wall here with all the skeptics. My Final Answer is this: All of you will see for yourselves.

  16. adamgh says:

    Apple’s system does allow publishers/developers to obtain some customer info (eg through subscriptions, but also through making Apps interoperable — we havent seen that much yet because OS doesnt yet support multitasking). Still think its mostly misleading to call it an agency model. Also think it unlikely that Apple will become defacto monopoly. Biggest player (or WalMart for books, tv and music) will be good enough for them. Sure there will be other players including direct to customer

  17. Don Linn says:

    One of the big problems publishers have had has been a lack of direct connection with their readers. One of the key success factors going forward will be knowing customers, gathering eyeballs (and email addresses), building communities and marketing directly in a focused and highly targeted way. To argue that since publishers have never had direct relationships with customers so this is okay is to miss the point entirely.

    I fear that the big six who are, one again, negotiating the deal for the entire industry, will be too thick to realize this and, with stars in their eyes over a new channel and a shiny new device, give away the opportunity to collect purchaser data.

    • mikecane says:

      Don has worked in publishing and is very savvy about tech and the realities of Internet marketing/selling.

      • stefn says:

        So people who agree with you are good; those who disagree are bad.

        • mikecane says:

          No. Those who disagree with me on certain issues need to see things for themselves. But by the time they do, they will have forgotten they ever held a contrary outlook. It’s all no-win on my end.

          • kevin says:

            I don’t disagree with Don at all except that I didn’t say the status quo was the best solution for publishers. However, that doesn’t mean that the app store model will fail. (i.e., Best Buy is doing fine selling Macs even though Apple Stores exist.)

            If you could better explain your position, I’m open to being convinced as to why the app store model will ultimately fail.

  18. His Shadow says:

    Look, I don’t want to be rude, but aren’t these fucking jackass articles about “How (Apple Product) will (disaster that will befall it) because (reasons irrelevant to actual business practices)” themselves complete and utter failures? Does ANYOMNE writing this blither ever do a search for “Why (apple product) will fail?” to see just how mind numbingly wrong every last one of these articles has been?

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