Apple Business Model: The App Store Miracle And Consequences

by Jean-Louis Gassée

iPhones and the iOS App Store offer an astoundingly successful example of Apple’s virtuous circle business model: Devices generate Services revenue and, in turn, Services help sell Devices by making them more useful, more pleasant. But such success comes with complications.

The iOS App Store seemingly came out of nowhere. From its July 2008 beginning with 500 apps to the end of Fiscal 2021 with about 2 million titles, the App Store has disbursed $260B to app developers. Apple doesn’t disclose its App Store revenue but, depending on its commission rate on app sales, somewhere between 15% and 30%, App Store net revenue for the 2008–2021 period would have been in the $90B to $110B range. For 2021 alone, given an estimated $85B in gross App Store sales, Apple’s net revenue share would have been in the $20B to $25B range. Still for 2021, this is to be compared to the entire Service revenue of $68B, less than iPhone sales of $192B but ahead of every other category, Mac $35B, iPads $32B and Wearables $38B. And, as Apple regularly reminds us, Services revenue keeps growing faster than the rest of the company’s business: 18% for the first nine months of Fiscal 2002, versus 6% for iPhones, 10% for Macs and even -6% for iPads.

At the beginning, I wrote the App Store seemingly came out of nowhere. It was novel compared to PDA and smartphone manufacturers’ disorganized efforts to help ISVs (Independent Software Vendors). For example, I think I recall a company called FreeHand that tried to market apps for Palm devices, but couldn’t find confirmation. (This is embarrassing as I briefly was Chairman of PalmSource before we sold the company to Japan’s Access.) In fact, Apple’s App Store came out of the iPod, out of Steve Jobs’ vision and legendary powers of persuasion. The iPod was introduced in October 2001 as an MP3 music player that could pack 1,000 sounds in your pocket and synchronize automagically with your Mac. Before the iPod, in January 2001, Apple introduced iTunes, a Mac-based “personal jukebox” allowing you to import, store and export MP3 files. The two came together with the April 2003 introduction of the iTunes Store. There, the most visible innovation was legally selling music “by the slice”, convincing BMG, EMI, Sony Music and others to sell as little as one song, one track at a time. Jobs presented iTunes as a partial remedy to piracy. The other less immediately visible change was the creation of a de facto micropayment system. iTunes pricing offered songs for 99 cents a piece, giving the artist 9 cents in profit. While credit card companies would not process a 99 cents transaction, if you looked a little more closely, you’d notice Apple waited until you bought enough songs to reach the credit card threshold at the time, $5 if memory serves, to bill and complete the sale. Less than a year later, in July 2004, Apple announced 100 million songs sold — and so on to 25 billion songs in May 2014. Then came Apple Music, a subscription service. Thanks to iTunes innovations and successful hardware iterations, by 2006, the year before the iPhone, Apple could have been called the The iPod Company as the music player’s revenue, $7.7B, surpassed Mac sales of $7,4B. The iPod allowed Apple to gain the engineering, miniaturization and Supply Chain Management (SCM) experience that helped launch the iPhone. For the App Store, all pieces miraculously came together: Apps were digital files like music, servers were already there, so was the billing infrastructure.

For small developers the App Store was a godsend. Building a Sales and Marketing organization is often said to be the surest way to bankrupt a fledgling company, The App Store allowed software creators to focus on what they did and liked best. The 30% commission took care of the rest. (That number was later revised down to 15% in specific cases.) Caricaturally, you could become a millionaire working in your pajamas in your parents’ basement. But… Apple being Apple and Jobs being Jobs, the App Store came with strict rules. The number and diversity of apps exploded and, with success, App Store rules became intractably numerous and complicated, vetting apps took more and more time, rejections sometimes were hard to understand or poorly explained. And, as the $$ numbers became bigger, so did appetites. Some large developers balked at Apple’s commission rate and the obligation to use its payment system. One such developer is a company called Epic, a game company, and you’ll find a very detailed rendition of the state of the legal dispute in an Apple Insider post. This isn’t about to be settled, the money and other interests at stake are too large. A number of government agencies in the US and elsewhere have been watching or even preparing legal actions of their own. App Store users have their own frustrations. Curation left to be desired, as navigating a huge (2 million titles) store became mind-boggling. The size of the task, of guiding customers through such a huge number of apps could feel beyond human possibilities. But so is the size of the opportunity, of better lubricating the virtuous circle connecting iPhones to iOS apps. I for one wonder why Apple doesn’t do more to reach out to existing or potential customers beyond the current iPhone App Store well-designed app opening screen that vertically lists App categories and recommendations. I once thought a weekly newsletter offering more detailed reviews and overview would be a good idea. I also felt Apple could more openly take a stance such as critically reviewing a category of apps and openly discussing likes and dislikes, all this in the name of promoting customer satisfaction — and Apple’s interests. In my admittedly naive and perhaps nostalgic theory, Apple has the resources to put together an editorial team for such a weekly adventure. But “nobody reads anything”, reader patience is limited and few would go beyond the first few paragraphs of a detailed review. Such seems to be the resigned consensus inside Apple. On the other hand, a consistent outreach effort wouldn’t fail to make an impression, to increase confidence, and to cause some people to search through past weekly missives for reliable advice on photo editing or meditation

On several fronts, Apple is now faced with what some call The Ransom of Success. In this complicated context, it’s nice to be reminded that the App Store is overseen by a trusted, historic old-timer, Apple Fellow Phil Schiller. Historic old-timer isn’t an exaggeration: Phil joined Apple in 1987, left in 1993 and returned in 1997 when Jobs came back. He then ascended to Sr VP of Worldwide Marketing and became known for his enthusiastic, occasionally feisty and competent product presentations. He became an Apple Fellow in 2020, a transition many, myself included, interpreted as a step towards retirement. It now sounds that his experience, authority and strong will help guide the App Store through possible stormy times and protect its virtuous circle business model. And some day Phil might tell us if Jobs saw the App Store in the company’s future when he introduced iTune and the iPod.


Apple Business Model: The App Store Miracle And Consequences was originally published in Monday Note on Medium, where people are continuing the conversation by highlighting and responding to this story.

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