LP Vol. 15 - A Bite at The Apple
Back in LP Vol 11, I pointed to Ben Evans's August 2020 essay discussing antitrust and big tech and had this to say:
I've been thinking a lot about the slow-motion collision between government and big tech. The initial overwhelming conclusion I've come to is we lack a vocabulary to properly describe both the power tech wields across modern life as well as the specific obligations of government to keep that power in check. Antitrust is the intellectually lazy way to deal with the problem. Ben Evans's framing of regulation is a better first step, but I'll have more to say on this soon.
After reading Matthew Ball's recent essay deconstructing Apple’s role in constraining the development of the metaverse, I wanted to revisit my thoughts on Big Tech regulation using Apple as a working example.
🍎 Matthew Ball: Apple, It's Control Over the iPhone, the Internet, and the Metaverse
Here's Ball's core thesis (emphasis mine):
Right now, we are on the cusp of the next internet. The terms used for this future vary and the degree to which you believe in one label or vision is not particularly relevant. And the technologies to design, enable and support the fullest version of this are as far from the capabilities of 2021 as the 1990s Internet is from us today. But what matters is that a growing share of our time will be spent within virtual spaces and with virtual goods — for education, work, health, politics and leisure. Sometimes these spaces and goods will be purely virtual, other times virtual twins of physical ones, and sometimes augmented reality. For related reasons, a growing percentage of our income will be spent on virtual assets, goods, experiences — many of which we’ll be able to sell, trade, share, use or improve. And of course, enormous new industries, marketplaces and resources will emerge to enable these opportunities, with novel types of labor, skills, professions and certifications invented to serve them.
The most important impediment today is Apple. Although no company has done more to propel the last 15 years of the internet, its policies are unlikely to produce the most prosperous overall ecosystem and do not lay a strong groundwork for the “next Internet”. Instead, Apple is inhibiting this future Internet. And it does so via tolls, controls, and technologies that not only deny what made and still makes the open web so powerful, but also prevents competition, and prioritize Apple’s own profits.
There's a cliched story often used to describe how the baby boomers took advantage of the best of American idealism, openness and ingenuity to achieve generational wealth and comfort, then pulled the proverbial ladder up behind them to consolidate their gains and prevent those that came after them for doing the same. After leveraging the relatively open and decentralized network effects of the early Internet, today's Big Tech giants have largely been guilty of the same behavior - creating a cornucopia of privately-owned, yet societally important, collection of infrastructure and networks that can be tithed and tilted to give their owners enough levers to protect an edge in perpetuity.
I agree wholeheartedly with Ball that we are in the early innings of a virtual economy likely to be larger, more dynamic and capable of supporting whole new classes of economic activity as foreign to us today as the concept of memes would be to our great grandparents. I also think we've never seen the combination of economic power, network dominance and long-term strategic thinking that many of today's tech giants display.
It's right to seek remedies to this dominance, but in general I think the anti-trust "just break them up" approach is overly blunt and the easy way out for those that don't grok the dynamism and upside of technology's potential. Specifically with regard to Apple, their vertically-integrated approach has accelerated the supremacy of the mobile computing substrate, but that past success should not guarantee them a default and perpetual claim to shape what comes next.
iOS is Where the People (and the Money) Are
Apple controls both the rules and enforcement of said rules that developers must play by if they want access to the most important slice of the mobile computing consumer market. As of 2020 Apple has achieved dominant share of the time and attention that flows through mobile in the United States. It commands:
66% market share (amongst teenagers this number is 80%)
75% of total app store revenue
80% of time spent on mobile internet
To illustrate what kind of economic impact that marketshare can have on the developer ecosystem eager to access those customers, Ball describes an upcoming change to how iOS provides unique identifiers that Facebook and Google (among many others) rely upon to deliver targeted advertising. The change in the so-called "IDFA" default from opt-in to opt-out is estimated to reduce the revenue of Facebook and Google by $5-20 billion dollars this year. Apple currently derives zero revenue from developers with ad-based monetization business models, which insulates them a bit from the collateral damage these changes may cause to the ad-tech industrial complex1.
I’m no fan of ad-tech, but unilateral changes to the IDFA are emblematic of the constantly changing rules governing iOS that have become increasingly byzantine over the past decade. These rules, granting Apple exclusive rights as distributor and payment processor of all digital transactions on their devices (among others), are why you cannot sign up for Netflix or Spotify directly from their apps and when trying to buy a Kindle book on Amazon you get booted out of the app to the same exact listing in mobile safari (where you may or may not be logged in, which increases friction during purchase conversion).
These rules all stem from a core belief back when Steve Jobs was still in charge that the owner of the platform is entitled to a cut of any transaction that platform facilitates:
A more recent example - when COVID hit in early 2020, developers like AirBnB and Classpass shifted to offering digital experiences to help their members augment revenue in a socially distant world. Apple blocked updates to their apps unless these now "digital-only" services cut Cupertino in for 30% off the top.
This position may have made sense in the early days of mobile, but is now increasingly problematic given the centricity of phones to our digital lives.
Services, Games, and the Fight Over Future Platforms
In my mind, Apple's App Store intransigence stems from a basic, yet profound, question: How do you follow-up the single most successful product in human history?
The iPhone was singularly successful in becoming the only $600-$1200 product thus far that most internet-connected people on Earth have figured out how to buy. Through a decade of financial engineering and market segmentation, all the people that can remotely afford to buy an iPhone have done so. The global market becomes saturated. How do you keep growing?
For the last few years, Apple's answer has been services.
The company has been launching their own bundles like Music, News, TV+, Fitness and Arcade to capture an increasing amount of consumer spend on apps and services themselves. They aggressively market these services to users through preinstallation on devices and prominent placement in the App Store. Apple services also enjoy a competitive advantage by forcing competitors to do the bulk of their customer acquisition outside of their own app or pay Apple 15-30% of gross revenue for the privilege.
And for those developers willing to pay the Apple Tax, what then? A recent spat on platform rules between Apple and Microsoft is illustrative. While "media bundle" apps like Netflix, Spotify and Prime Video are ok in the App Store, Microsoft’s attempt at a "game bundle" was unexpectedly subjected to onerous and undeclared deployment (of games as individual “apps”) and review steps. Microsoft has entirely rearchitected their Xbox Games Pass model to route around App Store restrictions in ways that are suboptimal for users and developers alike, and may never actually come to market as a viable commercial service on iOS.
Why? Gaming is big business for Apple.
75% of app store revenue and a larger share of profits come from gaming-related apps (hello microtransactions). A gaming subscription that offers a compelling bundle for a flat monthly price does a few things that eat into Apple's homefield advantage:
It could drastically reduce the net amount of spending on games similar to what happened to movies and music when those moved from a la carte to streaming consumption. Why buy 10 games for $10, each with their own microtransaction upsell models, when I can get access to a bundle of 100+ games for $10/mo?
It encourages developers to leverage tools provided by the bundle platform (in this case Xbox) instead of exclusively Apple technologies and APIs. This could be anything from cross-platform chat services (think having a conversation with a friend while you play a game on your phone and s/he competes from a console) to consolidated billing tools
Any disintermediation of Apple as the platform, distribution and/or billing option for iOS developers is a potential crack through which economic activity can flow un-tithed and competitive threats can grow.
So What?
But why exactly does this matter and why the deep dive into the weird competitive dynamics of iOS?
The runaway success of Google and Facebook have taught us that, at the scale of billions of users, friction matters and behavioral economics are real. I don't buy into a popular view on the left that owners shouldn't be able to compete on their own platforms, but I also think they should make it abundantly clear they compete on the merits just like any other competitor2.
Apple has out-executed the competition to such a degree that it is unlikely a competitive platform that offers the same level of performance, security and convenience will emerge. For the majority of the affluent, educated and technically savvy users willing to spend money on digital experiences, iOS is and will most likely forever be how they do so.
The iOS marketplace is singularly important and impactful as the place where the most educated and affluent users congregate and transact, and Apple leverages this objective truth to maintain monopolistic dominance in a handful of related digital services by preventing able-bodied competitors from proving it in a fair fight.
The development of this new computing substrate is too important to the societal, culturural and technological future for Apple to have a unilateral right to control its evolution alone. Just because they sell superior devices, they are not entitled to a de facto monopoly on the experiences those devices enable.
For Apple in particular, Ball calls for a few specific remedies in his essay that seem sensible to me:
Allow iOS users to download apps from any source
Support 3rd party app stores (like the ones Epic and Steam have built for PC)
Allow developers to use their own payment solutions for their apps, even if they're distributed by the App Store
There are real security issues Apple's current model of curation and distribution solves, but my overall feeling is they are leaning on this as a crutch to gain an advantage that has since run its useful course. It's hard to know just how many aspects of Apple's ecosystem remain first-rate and how many have atrophied due to lack of competitive alternatives.
Competition brings choice, innovation and change. It heralds a return to the spirit of openness that let the early Internet flourish and has brought much wealth and prosperity to our time. Most importantly, it gives young entrepreneurs the confidence to think proactively about solving and delighting users without the concern that a group of gatekeepers in Cupertino may kneecap their efforts to protect their bottomline.
It's time to shift our thinking to what comes next and recognize that great platforms, taken to the logical conclusion that they get used by everybody, belong to all of us and deserve to be open to competitive opportunities, not beholden to their forefathers in perpetuity.
Ben Thompson recently published a deep look at this brewing battle over the IDFA that is worth a read if you want to learn more.