Dangers of building on someone else’s platform

Apple is making it pretty clear that it expects to get a 30% cut of content sales that happen via iPhone apps and iPad apps.

A few days ago Apple rejected Sony’s Reader App for not providing in-app purchases for ebooks (purchases from which Apple would get 30%). To add to that it released a notice regarding subscriptions today. This part is particularly interesting -

“Our philosophy is simple—when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing,” said Steve Jobs, Apple’s CEO. “All we require is that, if a publisher is making a subscription offer outside of the app, the same (or better) offer be made inside the app …

It should be pretty obvious that apps like Kindle for iPhone are next. Apple will demand -

  1. In-app purchase options that are equivalent to browser purchase options. Thus making in-app purchases the path of least resistance.
  2. A 30% cut on in-app purchases.

Amazon will have to make a hard, hard decision.

There’s a lesson in here that goes far beyond Apple vs Amazon and ebooks.

Fairy Tales – How Platforms start off

The Platform company tells all the other companies – You provide the software/apps/content/books and we provide the platform. There’s just a small cut for us if you’re selling your app. We sell tablets/phones/operating systems and make money. You sell your stuff and make money.

It’s like a fairy tale – everything’s perfect. 

The Platform assumes every company understands that eventually there will be a tax and that the tax always applies. The companies assume that the tax doesn’t really apply to them – that they are a special case. That they are providing enough benefit just by being on the platform.

This is how nearly every platform starts off. Companies think they can get a free ride on the platform forever. Platforms think they can attract all these companies and make their platform a success. They think they will figure out how to maximize profit later.

The Power is Asymmetrically Distributed

The first warning sign is that Platforms become powerful very, very quickly. If a platform will turn out to be a good investment for a company it will be because the platform has taken off. If a platform has taken off that means the company is at the Platform’s mercy.

The company is only in a position of power at the very beginning.

At the start there is a somewhat equitable power distribution – Platforms need companies and companies need platforms. However, as the platform grows a few things happen -

  1. The Platform gets more popular and more powerful.
  2. The Platform starts viewing companies that helped it grow as parasites and freeloaders.
  3. The Platform starts getting jealous that companies using the platform are making a ton of money.

It becomes very easy for the Platform to shift from ‘win-win’ to ‘Platform wins 80% of the profits’. The platform just interprets this shift as ‘the right thing’. It doesn’t see how power and a sense of entitlement make it feel this way. It just assumes the right thing to do is impose a tax and get a cut of every company’s profits.

Companies are dying to be fooled by the Platforms

There’s a fable about a scorpion and a frog that’s worth reading if you have the time.

Consider a company that is approached by a platform. The platform says -

Look. We have customers for free.

Look. It’s so easy. All you have to do is make one little piece of software and all these customers will start paying you money. Zero Acquisition Costs. Infinite Profit.

What it really means is -

Make us powerful. Make software to make us all-powerful. Work for us for free so we can sell products for not free.

Until we become all-powerful we’ll let you have a free ride.

What the company hears is -

Customers for Free. Lots of Customers. Lots of money paying customers. And we’ll live happily ever after.

Can you really blame the platform here?

It saw human weakness. A greed. A hope that without making much effort a company could gather up lots of customers. It played on that greed and on that hope. If it didn’t, someone else would.

Can a company really blame a platform for its own disconnect with reality?

A Company’s Efforts go into Building a Piece of the Platform

This is how the company interprets it -

  1. We’re building a great app.
  2. We’re getting customers for free.
  3. We’re creating a following of customers.
  4. We’re in control.
  5. We’re a success.

Here’s the reality -

  1. It’s building a piece of the platform. A piece the platform can throw away or replace with another near-identical piece.
  2. It’s getting customers for free only at the start. If it starts to profit from them and if the Platform gains power – it has to pay the Platform tax.
  3. It’s providing value to the Platform’s customers.
  4. The Platform is in total control.
  5. The Platform is a success.

We’ve seen a lot of examples of who’s really in control -

  1. Apple is giving a first class demonstration.
  2. Every website does it by imposing its morals and ethics and financial priorities on people using the website.
  3. Facebook forced all developers to start using Facebook credits.

The Platform controls everything. To forget this is madness. It’s the Platform’s job to keep developers and companies delusional. To pretend that they are the one and only company in the history of the world that is going to prioritize integrity over profit.

The Platform Rules

There are the boring rules -

  1. Everything follows the belief system of the Platform. Right. Wrong. Left. Right.
  2. The Platform makes all the decisions. 
  3. The Platform decides everything.
  4. It’s not nice to beat the Platform’s default offering.
  5. It’s important to prioritize the Platform over profit.

There are the interesting rules focused on profits -

  1. It’s rather improper to make a ton of profit without sharing with the Platform.
  2. It’s especially rude to make more profit than the Platform.

All of these are pretty obvious. They are a direct function of the fact that the Platform controls everything. However, companies are slow to recognize and accept these rules because companies are so wrapped up in the fairy tale they have been sold.

To a Platform every company is replaceable

When Platforms start off every company and every developer is priceless – an irreplaceable gem that is critical for the growth of the platform.

When Platforms take off every company becomes a small, very replaceable, very forgettable piece of the total platform.

At that point the platform starts to remind every company just how replaceable it is – It wants a cut, it wants its ‘rules’ to be followed, it wants the company to do what’s best for the platform.

The company still doesn’t get it. It’s still in the fairy tale where it is a rare and precious gem and absolutely irreplaceable.

Amazon spent all this time strengthening the iPad

AT&T’s CEO wants to give Amazon a prize for its decision of making a reading app available for the iPhone and iPad. So does Steve Jobs.

The prize is the privilege of giving Apple a 30% cut on every book sold to a Kindle for iPhone customer.

We can spin it any way we like. However, Reality has a way of tearing up our little fairy tales and smacking sense into us.

Every eReader company was happy to produce reading apps for the iPad and make it a device that could access every store. Now, Apple wants to thank them all for helping sell iPads – by sharing in their ebook sales. It’s a fitting reminder that they shouldn’t have been giddy with the joy of free customer acquisition.

Note how Apple first tried to introduce iBooks and take all the iPad owners who were readers and transfer them to iBooks. When that didn’t work out Apple decided to just take a 30% cut from every eReader app. Why bother making animated page turns and flying carpet bookshelves when you can just levy a 30% tax on each and every ebook app?

The signs were always there. The Platform just treats companies as testers. They test various ideas and if they find a vein of gold, as Kindle for iPhone did, the Platform steps in and tries to steal it away. If it succeeds, then great. If not, then it just levies a tax.

Why not focus on building channels you control?

Amazon has been spending time and effort on making and improving apps for iPhone and iPad.

Why not devote those resources to adding all the latest software features to Kindle 2 and Kindle DX? Perhaps it’s just 2 million Kindle 2 owners and half a million Kindle DX owners. However, they are Amazon’s customers and customers that can’t be stolen away. Their purchases are purchases that another company can’t tax.

More importantly, they are the customers who made the Kindle a success. Who cares about someone who owns an iPad and buys from the Kindle Store because it has the best range – those are not great customers. Great customers are those that bought a Kindle. They should come first.

Amazon has been working hard on making Kindle for iPhone great. Buying into the illusion that Apple exists to provide Amazon with a free ride. Now, soon, there will be a 30% cut and all of the effort Amazon put into the iPad will be seen for what it is – effort that makes Apple’s platform better, effort that sells iPads, effort that leads to Apple making 30% from every Kindle book sold via Kindle for iPhone.

90% time on your own platform and your own products

That’s the lesson. At least that seems to be the lesson to me.

The seductive option is someone else’s platform. A platform that offers untold riches and an endless stream of customers. It also offers taxes and rules and regulations and red tape and lots of pain once you realize you spent all that effort making someone else rich and successful.

It’s much harder to build your own channel. To make your own products. But if you put in the effort you get your own customers. Your profit is your profit.

Everyone’s seducing everyone. A Platform is the ultimate seduction for a company – millions of customers, customers of good intent, little effort required to reach them, zero acquisition costs, an unspoken promise that things will always stay rosy, a certainty. It’s only much, much later that companies figure out that platforms aren’t fairy tales.

10 Responses

  1. It’s unlikely Amazon’s lawyers would have let them walk into this trap. It’s more likely that Steve Jobs has had a fit of pique and creative memory. I suspect Amazon will make Apple take them to court on this, claiming their original contract and/or discussions don’t support Apple’s current stance.

    I’m sympathetic to Switch’s criticism of Amazon’s prioritizing its apps for other platforms. The company should be prioritizing the addition of new features that he and we have suggested here, and/or keeping its K2 customers up to date with OS upgrades. (I’m glad I refused to buy until the K3 came out.) But I suspect that Amazon feels it has to prioritize meeting the head-on competition from B&N, which could corral millions of customers otherwise.

    What Amazon should have done was to really beef up its programming crew. It’s not too late.

  2. Sailing Ships vs. Cargo
    Trains vs. Freight
    Planes vs. People (thinkers!)
    Pipelines vs. Oil & Gas
    CATV vs. Content Producers

    See a pattern here?

    “Transport” producers always think they have the edge. But in the end “Content” is where value added services, and thus long term profits, lie. It’s just a matter of time.

    eBooks are just another delivery vehicle. eBookstores are content providers.

    The Kindle isn’t where the money is. The Kindle Store is. It won’t be long before readers are dirt cheap; but ebooks will never be cheaper than today.

  3. Good analysis. I’m surprised that anyone’s surprised. Amazon and Apple (and Google) are in a battle to control content that are moving from analogue to digital – music, books, movies.

    Device plus platform is the is the winning tools and the strategy is lock in. The Kindle pad will almost certainly be locked up as well.(We can safely assume that this development makes it a certainty that Amazon will produce one).

    • Very true. Yes, it’s amazing that Amazon would forget the whole ‘we attacked Apple and got DRM removed from music’ episode and start using it as a channel to customers.

      At the most fundamental Amazon and Apple (and Google) are, as you so succinctly put it, in a battle to control content as we move to digital.

  4. “sit and spin”… thats what id tell apple.

  5. Great analysis, but…doesn’t this same issue apply to people like yourself, who are developing apps for the Kindle? That is, you don’t control the platform – Amazon does. So isn’t it a risk that someday they will decide to up the ante on you and all the others who have made their platform a winner? And what can be done to hedge against such issues, if (unlike. Amazon) you simply don’t have your own platform on which to build? It seems there is much more to consider here.

    • Yes, very much so.

      That’s why I also do blogs and sites. Because it’d be stupid to focus 100% of your efforts on someone else’s platform.

      What can be done to hedge against the Kindle App Store being a winner – Nothing. The way the platform system is structured there’s not very much anyone can do once it’s a winner. It’s only at the start that developers have a chance of coming in and doing well. Later, it just comes down to making a lot of apps and hoping enough are winners to be a sustainable business. However, it’s very inferior compared to running your own website or selling direct to customers.

  6. Eh. Be prepared for the next move:

    Apple’s Next Greedy Move: Exclusivity

    http://mikecanex.wordpress.com/2011/02/15/apples-next-greedy-move-exclusivity/

  7. [...] We’re excited about moving to these new platforms and owning an app or two of our own. All the other kids have an app. We should have an app. According to a recent post on ireaderreview, as we move into our app on the new platform, we think: [...]

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