Additional Power for the Gatekeeper

Since ancestral times, wherever there is a narrow passage that many people have to cross, someone will try to establish itself as the gatekeeper and exercise control on the passersby. In fact controlling passageways, from maritime straits to oil pipes, has been one of the reasons humanity has endured many wars.

The digital space is not free of gatekeepers: they take the name of platform owners. When thinking about platforms that exert gatekeeping power, probably the first example that comes to mind is game consoles. Sony, Microsoft and Nintendo are masters of value capturing by charging game developers a fee for each copy of the games sold that run on their boxes. This allows them to recuperate the R&D costs needed to develop the console and the subsidies necessary to bring them to market at an affordable price.

The most known platform, Wintel, does not charge a commission on each program sold that runs on it. Intel and Microsoft make money solely by selling chips and operating systems. From the early days of DOS, Microsoft –and to some extent Intel, have tried to help developers to enhance their platform by providing tools to help them quickly produce Windows-specific software. Given the difficulties porting software from one operating system to another, once critical mass is reached, developers only develop for Windows and users are forced to buy Windows because there is where the applications are.

So, traditionally, companies striving for gate keeping strategies have been following one of two strategies: (1) grow the platform by heavily subsiding it to then extract rents by charging complementors to use it, the game consoles strategy, or (2) leverage network externalities so much that users have no choice but to buy the platform as all complementors are there already; the Wintel strategy.

But now there is a new strategy: make money both ways, by selling the platform very profitably, and at the same time charge complementors to use it: this is Apple’s strategy. That Apple makes a ton of money selling iPhones is not a secret (never mind iPads!) As can be seen in the side graph by asymco, Apple makes about 70% OF ALL profits made by the smartphone industry(*) with an estimated $6 billion in Q2 2011. Having seen this, one could think that the business model would rely on growing the platform Wintel-style, by inviting as many developers as possible to fend off competing Android attackers. But nothing further that reality. It is true that the Apple Store hosts and distributes apps for free (this was announced with great fanfare by Steve Jobs when introducing the App Store, see video from minute 3:20 or so) and charges 30% commission on all paid-for apps allegedly only to subsidize running the store, but just last week announced that it would enforce its restriction on direct-from the app purchases.  What this means, in fact, is that apps like e-readers that to purchase content directed the user directly from the app to the developer’s site to performing the transaction, alien to the Apple store, would be “illegal” in Apple’s terms. The consequence is that the purchase has to be made through the Apple app store and therefore be subject to the 30% commission.

Even when you have an enormous market share, this is a risky move, as you are inducing complement providers to move to a competing platform and therefore weakening yours and strengthening a competitor. I cannot imagine Microsoft expecting to get a cut on each application sold for Windows, never mind on content read or watched on a Windows PC. What will content providers do in the Apple case? Some initial movements by publishers seem to indicate indicate that not much, and apps like Nook are already updated removing the direct purchase button. This will imply that users will have to either buy the content via the Apple store, or go directly to the web page of the content provider, transact there, and then move the content to the iPhone or iPad. Cumbersome and less clean, but such is life when the gatekeeper enforces a toll: passersby take an alternate route.

What this will do the power of the iOS platform remains to be seen. The next months will tell, but seeing the profit share on the smartphone market, Apple can make a few experiments.


(*) This, by the way, should make all companies that rushed to build Android phones think about the commoditization of their product and what future they have. But this will be the topic of another post.

About Josep Valor

Josep Valor-Sabatier is professor of information systems and information technology and holder of the Indra Chair of Digital Strategy. He received his Ph.D. in Operations Research from MIT, and his Sc.D. in Medical Engineering from the Harvard-MIT Division of Health Sciences and Technology. Josep Valor teaches extensively at the senior executive level on Management Information Systems, Media Management, Management of Technology, and Strategy.