Or the disruption of the disruptive app stores

 

The Internet is so great because it’s free, and by and large accessible to so many people. People use their phones now more than computers to access the Internet and do other things. But… phones aren’t free, and neither are most apps that you need or want.

Imagine a world without touchscreen phones. Or Imagine at least if Apple overlooked the phenomenon and just kept making iPods with scroll dials. Hard to picture, right? Would you even be able to read this right now?

Well it did happen. And here we are. But the phone itself was just a slight of hand. Like a magician who gets you to divert your gaze so she can pull off the illusion. Apple didn’t invent the mobile phone, or the smartphone, or even the touchscreen. In fact, the original iPhone was a lesser copy of all the things we were already using. And yet even today it still feels like it IS the thing.

Steve Jobs 1st iPhone

But I saw what the magician did. And thankfully I’m not a magician so I don’t have to abide by the code (don’t tell people the trick!) and so here it is: Apple shipped the biggest shift in business practice since the dawn of doing business itself.

Apple shipped the biggest shift in business practice since the dawn of doing business itself.

iTunes and the App Store, together, represent the first time in history that the warehouse owns the customer.

What does that mean? Let’s use a corollary to understand it. Suppose a big box retailer, say Walmart, didn’t know anything about you. You walk into the store and purchase a 24-pack of toilet paper. The information that Walmart gets is “someone bought a 24-pack of toilet paper”. But the warehouse gets the transaction details, and they can see that it was you, that you’re a frequent shopper, that this is a different brand of TP for you, you have a rewards card, you also shop at Target (and usually spend more time and money there), your spouse also shops at this store location, and…ok, you get the idea. Bottom line is that Walmart would NEVER do business like this, and if they did they’d be out of business in days or weeks.

Cat toilet paper

And yet what does Apple do? (Yes, Google does it too.) They warehouse and deliver apps for developers, or songs for musicians. What does the developer/artist get? “Someone in North America bought your app/song.”

There’s a reason that businesses don’t scale in mobile, and why almost no one can make money doing it.

Let me show how the “financialization of mobile” works. And the effects it causes.

Makers and Takers by Rana ForooharRelated note: A wonderful and insightful new book by Rana Foroohar unpacks the recent (last few decades) impact of the “finacialization” of business. I love that term! And I’ve clearly co-opted it here. Makers and Takers: The Rise of Finance and The Fall of American Business is like a realtime historical tome of what’s happening right under our noses on Wall Street and in corporate America. It’s part fact, part warning, part call-to-change, and fully unsettling. I’ve only yet read excerpts and interviews with the author, but can’t wait to complete the book. Tl;dr — most of the money being made is made from other money in a closed loop, not from investing in businesses, jobs, etc. It’s how we got the 1%, or the now fraction of 1%.

Back to warehouses owning customers… To simplify, let’s focus on a mobile game developer. I was one (am one?). Back in June 2007 when fanboys and girls collectively peed themselves a little at the announcement of the original iPhone, everything seemed possible; except cut-n-paste, that still wasn’t possible. I and others would later refer to the couple of years that followed as the “gold rush” phase.

During the app store gold rush there were few developers, a rapidly growing user base, and only one place to buy games. On July 11, 2008 there were only 500 apps total in the store^. Those developers knew they could hitch a ride on Steve Jobs’ coattails. Even though one year later there were 65,000 apps^, the odds were great that you could not only make money, but quite possibly a LOT of money in games. One such winning game from those days is Doodle Jump. By 2010 the newcomer Angry Birds would fling to #1 and stay there off-and-on until today. See, even a game where you slingshot a bird could make money during the gold rush. The opportunity cash pie looked like this:

App Store gold rush chart by Andy Rosic

Just two years into existence the app store had reached 225,000 apps and 5 billion downloads^. This is where it reached the “should have been here yesterday” phase. Similar to the California gold rush, there were those that came along after hearing the tales of how much money people were earning and how easy it was. Except the problem is that it was already getting markedly harder to get your game noticed in the noisy din of thousands of games (and apps) releasing each week and soon each day. In another three years there would be 1 million apps and 50+ billion downloads.

You probably just did the math. And you’ll say to me that there are only 4x as many apps, but 10x the downloads. This is good news! Right…? Ah the lure of gold. In theory it does seem to make sense that the app stores and the mobile marketplace were still fantastic and should be approached with gusto. Make MOAR games! The sober reality is that the app store had already become more of a barren wasteland than a mine running rich with veins of gold.

Why doesn’t the app store work? The numbers check out.

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The reason why you thought it should work is that you’re looking at the wrong chart. And the reason it actually doesn’t work is because the warehouse owns the customer. Or did you forget that already?

Check your chart. Remember the opportunity cash pie from up above? Most game developers, or any developer, took that chart and as the ecosystem grew they extrapolated it like this:

App store wrong chart by Andy Rosic

They were wrong. In most all of the cases, dead broke wrong. The proper way to view the now more mature app store opportunity cash pie is like this:

App Store shoulda been here yesterday chart by Andy Rosic

All the monies don’t stay nicely distributed. Instead ~99% of developers get table scraps, or lose money, and 1% control the vast majority of the income. As you can see it’s nothing like the ‘wrong chart’ expectations. The top, fractional echelon of developers make money from the money they’ve made (see Foroohar’s book) and the rest are left holding dreams and debt.

That’s the chart, but how does this warehouse concept perpetuate the problem? Remember that the iPhone was the slight of hand, the trojan horse, for the real trick: the app store. Not only did Apple create an instant monopoly, they required an outlandish and unheard of fee (30% of gross) to place inventory in their warehouse, and that fee never scaled or changed. And at the tail end of that retail beatdown was nothing. No data, no connection to your users, nothing. Apple keeps it all. Even as bad as the monopoly and the fees are, the shift in total control of the user over to warehouse Apple (or Google, lest we forget) is the nail in the coffin for our game developer. How can a business hope to grow new users, nurture existing ones, up-sell, or any other growth hack if they know absolutely nothing about their audience? They can’t.

This is evidenced by the fact that an entire industry has spawned from developers’ inability to access user data. There are many wonderful tools and companies to help developers such as Chartboost, App Annie, HeyZap, TapJoy, and on it goes. But all of them only exist because of the app store’s upsidedown perversion of the mobile marketplace. Here’s a chart with some of them:

mobile ad ecosystem

Growth is still possible, kind of. If you have a lot of money to spend, and I’m talking millions not thousands, or if you happen to go Flappy Bird viral, then you stand a chance at buying more users, staying in the top charts for organic downloads, and making some decent coin. However, you likely have a better chance at getting struck by lightening, twice, while sitting on the toilet. Best keep that Walmart TP handy.

Now that we’re all depressed, what happens next?

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There is light shining through the cracks in Apple’s hardened vernier. Whenever you have a monopoly, high fees, and no shared data, the people will eventually mutiny and either overthrow their oppressor or just leave them behind to fade away. Enter web subscriptions, not through iTunes, for mobile app services. Enter chat bots — the new fad of using artificial semi-intelligence to deliver answers to requests within skyrocketing chat apps like Messenger, WeChat, or Slack. Why waste a tap and open a movie app when you can just ask your chat feed and have a bot serve you up an answer like a digital butler?

Moving payments outside of the app stores was a blow to the big monopolies. But still isn’t en vogue widely enough to cause much of a stir. But bypassing apps altogether with chat bots has the big warehouses scrambling to stay alive. In the new chat bot gold rush, the potential for a power shift is high and the opportunity cash pie chart will look very familiar:

App Store gold rush chart by Andy Rosic

What’s harder to foretell is whether bots will end up consolidated on a couple of platforms (the new warehouses), or maintain a better local store flavor. Will Apple’s warehouse finally just be the simple warehouse that delivers your shell chat app so your bots can rule, er, help your life? Does Facebook become the new Apple? {shudder} Will bots die an untimely death when people realize they just can’t be accurate or ‘smart’ enough? Hard to say.

I don’t think bots will be the end thing. They are simply the herald. We’re leaping forward by leaping backward and getting out of the muddy mobile app space, but where we land next is largely up to you and me. I’m excited for the promise that it holds. And I certainly don’t think any of us should settle again for such a closed loop magic incantation.

//Originally published at Startups.co

//Previously posted on Medium