Posts Tagged ‘strategy’

The 30% Rule

The powers that be have decreed that all subscriptions bought via Apple’s iStore must pay the piper to the tune of 30% of the take. My question concerns, very simply, why?

Indeed, credit card companies routinely take 2-5% of net receipts of sellers, a small ‘convenience fee,’ and there is nary a whisper about this part of their business (though this might be changing). Groupon, from industry murmurs, takes 50% and people are either wildly positive or negative about that. All said though, the Groupon value proposition is that businesses can/should convert those first time customers to repeat customers without paying the Groupon tolls.

The 30% Apple Tax appears to be too large to fit into the former ‘convenience fee’ category. And since it charges repeat business too (e.g. if I sell a monthly subscription via the iStore, I owe Apple for every month), it doesn’t quite fit the Groupon ‘large upfront cost for customer acquisition’ model. So, indeed, what is it?

My suspicion- this is a ploy to make the apps that compete with Apple’s walled garden less competitive- in particular Kindle (v iBooks), Netflix/Hulu Plus (v iTunes video), Pandora and so on. All the 30 percents in the world wouldn’t make a dent on Apple’s large revenue streams, and wouldn’t be worth the bother in and of itself. Dressed as a move to herald and improve consumer choice is potentially an interesting variant on Apple’s standard walled garden- if you have content we approve of/ you hand over to us (via say iBooks), we sign you a potentially better deal. Otherwise, you pay us a crazy percentage.

Now you might say- crazy conspiracy theory, but where is the evidence? As with all conspiracy theories, I don’t have any. I do offer one potentially telltale sign though. If this control freakiness is, indeed, the root of Apple’s decisions, then they will potentially reduce the investment on the one part of their system they cannot control- the Browser. So how much will Apple invest in their browser- mobile safari? It already seems strange that for a platform so otherwise well put together, their browser is painfully slow, under-innovative, and generally a pain to use. If it falls further behind whenever Honeycomb makes the leap from vaporware to reality and the iDevice 2011 edition responds, I think we have an answer…

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By the time this post is up, Nokia will have announced its new strategy to go with Windows Phone 7 in some shape or form. With the HP/ Palm marriage consummated, this will leave us with 4 major platforms in the smartphone space  (I’m assuming that the two Nokia OS’s will soon be put out of their misery). So here are my thoughts on how this will play out-

  • With WinP7 now tied to Nokia, I suspect the other manufacturers will slowly bow out of that platform- one dominant OEM is bad news for smaller OEMs. If that happens, a lot of their joint future depends on how fast Nokia can get competitive WinP7 devices to market.
  • HP/Palm will win several awards for the best product brought to market roughly 6 months later than needed to be seriously competitve. There’s something to be said for just getting stuff out the door.
  • Android Manufacturers will win the award for worst executed vision- a special commendation to Motorola for Xoom pricing and the Atrix Dock. Android Jalebi launches late December 2011, bringing some much needed Indian representation to the high tech industry.
  • The iDevice behemoth will hopefully, at some point, slow down (try the 2:50 mark). More realistically, I suspect they’ll continue to sell millions of devices to people like these. John Gruber will exult on how this shows how truly individualistic humans are.

To summarize, the carriers win as all 4 camps make concessions to get carrier support for their device(s). Apple makes lots of money, Google makes a fair bit on mobile, Microsoft continues to dump money in the general direction and HP makes the most beautiful printers anyone’s ever seen.

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There’s a third reason that wasn’t covered this morning- Making ecosystems that develop within Fbook stick inside Fbook.

For example consider Zynga (the people who make Farmville and all those other games I can’t imagine why anyone plays). At this point, Zynga can potentially get people from Fbook, and move them to their own Zynga ecosystem, collect their billing details and all. Facebook gets neither the x% cut, nor the incidental traffic/ spillovers these people generate- Zynga keeps it all. By contrast, if all their users had signed on using Fbook Credits, the people would likely stay within the Fbook family.

Apple has successfully done this already (App Store, Itunes store)- and is now defending its turf. Google is moving to make its checkout option more attractive to developers and convenient to end users. Of course, Xbox Live has long had a vibrant credits community. So in short, welcome to the party Facebook!

As an aside, today’s piece also raised the quirks of mental accounting, and how people spend too much in small increments . I figured I’d pick up my karma points for the day by plugging a new website that uses these powers for good (i.e., the good of society, not its own). The Philanthroper offers a $1 deal a day, a la Groupon, to a selected charity. It uses a micropayments system that guarantees that roughly 99c makes it to the charity rather than disappearing into amorphous ‘administrative fees.’ Visit them and donate. Drink fewer 3$ lattes if you must.

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Long term strategic excellence is not hallmark of the airline industry. Their wince-worthy choices are a staple for MBA case-studies on winning the battle and losing the war. E.g. the old joke- Q: How do you make a small fortune in the airline industry? A: Start with a large one.

Recently, after some he-saidshe-said, American Airlines fares no longer appear on Orbitz or Expedia. To the world this appeared a time-perfected shoot-yourself-in-the-foot move. To academic economists, this was a cunning ploy to use the Diamond paradox in their favor. The truth, as always, lies somewhere in the middle.

The Diamond Paradox in English- standard price competition leads to low prices. But suppose we add a small search cost. A company can now raise its price by a small amount, since people would rather pay the slightly higher cost than pay to search. The competition can now raise it’s price as well. But our original company can now raise prices again- and so on. This ‘raveling’ stops when all companies are at the monopoly price, even though we have competition with only a small search cost.

The AA play is not to be only available on AA.com- indeed they were the pioneers behind the idea of a computerized global distribution system originally. My explanation: They want to use their newer direct connect feature to better sell ancillaries, e.g. baggage, seat upgrades etc on online travel sites. This removes an asymmetry: the old GDS’s are just not built to handle it, the direct websites (AA.com, Delta.com are). Since most of their lowest base fare customers come from these online websites- selling them these add-ons is critical. Cutting double marginalization- incidental benefit.

Why do I think it isn’t a Diamond paradox play? North American airlines are low on cash. Unilaterally withdrawing from a cash generator is a bad idea- the competition is happy to watch while you haemorrhage. Airlines’ actions are always short-term cash generating- and as a “push up search costs for everyone” strategy, it definitely isn’t.

And why do I think it isn’t a classic shoot yourself in the foot move? Oh it probably is, it just has a subtle, almost plausible logic to it. As always.

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While browsing the interwebs, I found a startup that fills what I thought was the biggest competitive advantage that Amazon has (had?) over other web companies that try to sell you ‘real’ products: competitive shipping. See Amazon has this thing, Amazon Prime – sign up for it and most stuff on Amazon has 2 day free shipping. It makes everything on Amazon more appealing. The real problem most places have competing with Amazon isn’t people finicking about leaving their credit card details around (pay pal/ google checkout solved that a while back). It isn’t sites’ privacy policies (people barely care about where they park their e-mail apparently– see their answer to FAQ 2). It’s probably not even filling out a form (while I agree this can be a bit troubling, most modern browsers autofill decently).

I suspect, of course, that this solution by itself won’t be enough to usurp the overwhelming dominance of Amazon. It’ll first need some sort of wrapper navigation button/bar that immediately enters shipping and payment details (a la the 1-click shopping button on amazon). It’ll then need to invest heavily in a state-of-the-art inventory system to keep costs low, and competitive with the big A. It would then need to cut consumers’ search costs by implementing deep search across all its partner websites. Final efficiency gains could be realized by investing in a homogenous UI, to make it easier for users to navigate across partner sites. At this point a sort of aggregator landing page for users to start from would help. Put this all together and we have… Oh wait. Another Amazon.

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