If we consider the various Kindle Reading Apps from Amazon’s perspective, they seem too good to be true -
- Spend a few hundred thousand dollars each on making reading apps for iPhone, Android, iPad, PC, Mac, Blackberry, and Windows 8.
- Get millions of customers each month.
- These millions of customer buy books from you each month.
Money for nothing (Dire Straits would approve).
However, there are a few big hidden caveats. Let’s start with the first.
Kindle Reading Apps can never be as Valuable as an actual Kindle or an actual Kindle Fire HD
- Exclusivity – The only reading app on these devices is Kindle. Note: Yes, you can sideload. No, most people won’t sideload a different reading app.
- Power of the Default – The DEFAULT is the Kindle Reading App. This is a very big deal. Depending on what survey/set of statistics you read, between 50% to 89% of people never ever change their default settings.
- Optimization – You can tweak and optimize the reading app and the device to provide a GREAT Reading Experience. You obviously can’t tweak the hardware of an iPhone or a Blackberry if all you have is a software reading app.
- Integrated Store – Apple sets its rules where either Kindle and Nook pay Apple 30% or they remove the store from their Reading Apps. Kindle Paperwhite and Kindle Fire HD allow the store to be integrated with the reading experience. Note: It’s well and good to say – Users can just go buy from the browser. However, the truth is that users want convenience – they want the store built-in.
- Sell Other Things – Amazon and B&N both sell movies to Kindle Fire HD and Nook HD owners. With a reading app, they can’t really do that. Yes, they can release a separate app – But then things aren’t easy or smooth. Again, the power of the default kicks in.
- Visibility – Tap ‘Books’ on a Kindle Fire HD and it starts the in-built Kindle Reading App. What better visibility could there be? There are numerous things like ‘Recommendations’ and ‘Sponsored Ads’ that promote the in-built Reading App and the Kindle Book Store.
- Subtle Lock-In of Users – There are various types of lock-in and one type is having the user used to the device and to the reading app. Familiarity. With your own device you can increase this cognitive lock-in.
There are other advantages too. Hopefully these 7 advantages illustrate why owning the Device, in addition to the Reading App, is a big competitive advantage.
The second big caveat is that with a Reading App you’re building a Castle on someone else’s property.
Building Castles on Other People’s Property is a Bad Idea
You decide to build a castle on someone else’s property. Then you start a business of running tours in the castle. Money for nothing – right?
Well, not really.
Let’s look at the obvious risks -
- You can get taxed. The property owners (App Store owners) can start charging you money. There are lots of examples of App Stores that didn’t charge money and then later changes the rules. Facebook used to give developers 100% of earnings. Now it’s 70%. Apple used to allow free in-app buying of books. Now there’s a 30% tax.
- You can have your castle broken down. You get up one fine morning and the land owners claim you broke the terms of the original agreement and they’ve broken down your castle. All your hard work and blood and sweat – Gone!
- You can have your castle hidden. The owners of the land might realize there’s a lot of money and they might build their own castle right in front of yours. Users can’t even see your castle any more. Note: With App Stores this is absolutely terrible. It’s as if your castle no longer exists. At least with something physical, it’s there for people to see. With a virtual thing, such as an app or a game, it just vanishes.
- You can have your customers rerouted. Let’s say you build up a big business and have lots of customers arriving, on someone else’s property, to see your Castle. That someone else can set up businesses and other amusements that route your customers elsewhere. This isn’t an issue until you realize that you’re spending money attracting people to the castle but they’re ending up spending their money elsewhere.
- You can have your castle taken over. This is perhaps the worst case scenario. You have your customers and your castle and all your investment taken over by the land owners. You find out that the property rules in that part of the world say that if the castle is on their land, it’s theirs. Should have read the fine print.
- The land owners might make a mistake and drive traffic away. Perhaps they loan out part of their land to a nudist colony and families stop visiting your castle. Perhaps they erect a graveyard right across the road from your castle.
- The land owners might not take proper care of the land and a natural disaster might cause huge damage to your castle. Keep in mind that not just your mistakes, but mistakes on the part of the land owners could kill your business. There are two big ways in which things can go wrong, instead of one.
The truth is that when you build a business on someone else’s land (app store, website, device) – You’re doing free Research & Development for them. You’re staking your future on their future. You’re leaving the future of your business in their hands.
Chances are, sooner or later, this will come back to bite you.
The third big caveat is that human nature won’t allow the land owners/store owner to let you succeed freely.
Your Castle doing too well means the Land Owners want the Lion’s Share of the Profits
Think of it from the perspective of the Land Owners – They were so generous and let you build a castle on their land. Then they watched in shock as you started doing better than them. They just want to make things right and get most of the profits.
The ideal situation for the Land Owner is what Apple has with the App Store -
- Lifetime Amount Paid out to App Makers – $12 billion.
- Lifetime Profits for App Makers as a Group – Negative Profits i.e. Losses. Note: If you were to average out the costs of the 700,000 or 800,000 apps in the store, even if you assume just $20,000 spent per app made, that’s $14 billion. Now factor in marketing costs, costs to do updates, costs to service customers. We will easily reach $20 billion in costs.
- Monthly Profits for Apple from selling $500 Phones and Tablets that come with super cheap $1 and Free Software – $3 billion a month.
That’s what makes App Store owners and Land Owners happy – Look at all these app makers toiling away for Negative Total Profits (with the most profitable 2-4 making $50 million a month) while we make $3 billion a month in profits.
That’s the role the land owner envisions for you when they let you build a Castle – You are helping drive people to their lands and properties and making them money.
If the situation reverses (for example with Zynga and Facebook, at the time Zynga was riding high), then the Land Owners (they are human after all) get jealous and spiteful. They do things to steal your success and/or kill it -
- Route users to someone else’s castle, or to the land owners’ own castle.
- Divide and Conquer. Split up your customer stream between you and three-four other competitors.
- Kill you by taking away your advantages. What Facebook did with Zynga - Zynga got killed because Facebook just nullified Zynga’s advantages and built up other developers instead.
- Tax you and make your venture unprofitable or far less profitable.
- Hide you so you get far fewer visitors. This can be done in lots and lots of subtle ways.
- Close down the Lands. If you’re making millions in profits while they make nothing, they might just close down everything.
- Sabotage you in subtle and not-so-subtle ways.
For every example of an App Store or Device that’s happy to see other companies make more profits than the device/store owners themselves, there are ten examples where the app store owner/device owner moves swiftly and decisively to close things down and/or to reroute the lion’s share of the profits to themselves.
It’s like Vegas – The House Always Wins!
If Apple iBooks has 20% Market Share, that means Apple will close down Kindle Reading Apps sooner or later
This is how it works -
- You allow the Reading Apps in. So that customers buy your device.
- You tax the Reading Apps and/or add subtle changes so that the experience of reading books and buying books becomes better with iBooks.
- When you feel you have enough momentum and lock-in, you kick out other reading apps and shift everyone to your reading app.
What was the role that Kindle and Nook Reading Apps played? Getting people to your ecosystem.
How long are they needed? Only for as long as it takes until users get attached/locked-in to your ecosystem.
Apple and B&N are thinking – Wow! We’re getting customers for free who are buying books from us and making us $2 to $4 per book.
Apple is thinking – Wow! We’re getting customers who would have chosen another device. They are making us $200 to $400 per device. Once we have enough customers, we’ll do a calculation and if the money from books is more than from additional device sales due to Kindle and Nook Apps, we’ll kick them out.
As we sell more and more devices, the inflection point gets nearer and nearer. Apple and Google are going to teach Amazon a harsh lesson in the rewards of building Castles on other people’s Properties.