Better Marketplace beats Better Device

A lot of people have asked me about the iPad since the unveiling.  The questions lead me to wonder what was expected?  A beefed-up iPhone? Or a slimmed-down Mac? A merger of both?    Will it wind up like the Mac Cube, iPod Hi-Fi, or Apple-TV products?

I now think the question of ultimate success may come down to who can provide a better on-line marketplace for things that can be downloaded.  And that requires defining how to compare marketplaces, especially digital marketplaces for digital goods.

Some thoughts on a good marketplace:

- large base of suppliers to make the goods

- efficient transport of goods

- efficient & secure exchange of money for goods

- large base of consumers to buy the goods

- effective means for consumers to consume the goods (computer devices for digital goods)

- builds and retains high consumer and producer confidence and trust

A financial specialist can add a lot to the list, I’m sure.  And when I say “efficient”, I include quick, low-cost, and easy-to-use.

Did Apple succeed in an mp3 player market by competing better in all the same old ways?  Apple’s products cost MORE. They usually had less storage capacity. Apple actually delivered fewer features.  What Apple did have was a better marketplace for the digital goods that customers consumed with the Apple’s products.  (Example: 99 cents for the one song you wanted, not $18 for the whole CD, and you get it now, with one-click.)  Customers have shown us their opinion of that value proposition.

Did they succeed in cell phones by competing on the same terms as everyone else? The iPhone was expensive, even for a smart-phone. It did have that nifty voicemail trick to go right to the one you wanted.  And it was an iPod, albeit a low-capacity iPod.  But it had always-on access to the song marketplace and a need to make sound to announce calls.  It extended the marketplace to songs-as-ringtones and extended the sales opportunities to include the consumers’ musical whims. Need a song to fit the current mood?  Heard a cool song on the radio and want to buy it?  Apple made a deal with the trendy Starbucks company to allow their Macs and iPhones to make free wifi connections to iTunes and not only buy songs, but see a display that could let them know what song was playing in Starbucks at that moment.  The current-song feature no longer works, and apps can recognize music for you, but you can still connect to Apple’s marketplace for free in a Starbucks.  Starbucks still distributes free-iTunes-song-of-the-week cards.  Perhaps it is no coincidence that AT&T now powers Starbucks’ internet in place of T-Mobile.

Apple further extended their marketplace with big-name TV shows and Movies in conjunction with an iPod Video.  In another move, they extended their audio marketplace by adding audio-book and talk-show content from “Audible.com” This partner enjoys continued success and expansion of its product line. Inclusion of such extremely long audio content caused some problems in the iPod players, but Apple upgraded the software to fix them and customers continued to buy.

The NeXT extension to the marketplace: inclusion of software to subscribe to the new audio category called “Podcasts”.  Now large amounts of totally free audio programming is available to marketplace customers.  Most of these programs were shows with too narrow an audience for radio broadcasters, or were too time-sensitive for traditional physical distribution or were just experiments by enthusiasts.  But many podcasters have succeeded financially.  Some now have audiences that radio shows would envy greatly.  Since some podcasts send video, that expanded Apple’s video marketplace.  And all Apple did for these podcasters and consumers was make it easy to find, subscribe, download and listen..  The audience for podcasts exploded. The number of podcasts grew (and continues to grow). Audio professionals have a whole new industry. Apple never spent any money to distribute the shows.  Apple did introduce a means of putting images and chapter markers into audio shows. Now an Apple device can show a picture on the screen at the show’s direction. A consumer might see the topic of discussion. The chapter markers allow a consumer to jump around a long show more easily.   This was, in a way, a first test of doing large amounts of business with small producers.

Now consider Apple’s extension of the marketplace to include Apps for the iPhone. Apple reportedly gave up the deal that netted a percentage of AT&T’s large monthly fees for iPhone data service. Apple opted instead for control of the App sales in their marketplace instead.   This marketplace has new wrinkles: a very large number of very small producers making very large numbers of very small transactions.  It started out slowly and had a lot of growing pains, but Apple basically built a means of making a large number of deals with a large number of small developers to sell their low-priced apps for a 30/70 split. Unlike the free podcasts, Apple helps deliver the free apps to marketplace customers.

Putting aside the gold-rush urban legends, the real question is “did those producers find the marketplace a good deal?”  App developers chafe at some of Apple’s rules and restrictions.  But do many profit well? Even after Apple takes 30%?   Do customers do well?  Are they paying more or less for the goods they buy? Do they get more value or less value?  Does the system build and retain trust of both?  The answer is apparently “Yes”.   But consider this: Apple does not dictate price in the App marketplace.  And yet the prices have continually gravitated toward the minimum of 99 cents.

An upcoming question: If a similar marketplace is created for book authors and musicians, would they prefer it over traditional publishing/distribution companies?  (Some books are already sold on the App Store as Apps.) Maybe not for the authors of books with large mainstream audiences.  But what about all the others?  The books that would barely rate a “yawn…OK” from a traditional publisher?  Books with a niche market?  Books that are enjoyed, or are good references, but not convenient to keep around in paper?  (High School and college book-bags can get really heavy.)

For producers of any kind, 70/30  may look a lot better when you recall that transaction and distribution costs comes from Apple’s 30% (and the $100 annual fee), not the producer’s 70%.  For small producers, the work Apple does for the money may be indispensable. Recreating the infrastructure, marketing and financial deals Apple has would be impossible.  And thousands of very small modest marketplaces are not as interesting as one big, really good marketplace.  And who makes things easier to use than Apple?  Also,  Apple actively markets the devices and even picks some Apps for inclusion in their TV commercials.  I’m told those lucky apps gain large sales, but none of them had any influence in their selection.  (Agreeing to let them do this is part of the contract to get a developer account.)

Its possible there is still much for the world to learn about building and running a successful digital marketplace. Most business practices are based in lessons from producing, delivering and selling  physical goods. Still, the trust and confidence issues may prove to be the biggest frontier.  Can producers trust the marketplace?  Will Apple raise their cut? Will Apple make restrictions that are too tight? Will producers be put out of business by out-of-control copying?  Can consumers trust it? Are they safe from rogue producers?  Will their purchases be worthless if something happens to Apple, AT&T or the producer or the deals between them?  Will the purchase be worthless if a particular device is no longer available or a system upgrade is incompatible, or a new device takes over?  Will Apple or the producer simply decide to take it back? (Remember Amazon’s “1984″ take-back from Kindles?  Perhaps this is why DRM-free music sells better?)

To get back to the iPad:  while it is new and unproven,  it ships with a considerable, ready marketplace. It does something to expand that marketplace by being a consumption device with more screen size and cpu power.  It expands the ability to consume the goods. Its connectivity will make the opportunity for sales larger by making the marketplace available at the consumers’ whim (heard that song in the restaurant, bought it;  thought there might be an App for that, bought two; didn’t have to remember to find it on the home computer later on.)  Indeed, the connectivity and power mean that a separate computer is not needed to access the marketplace. Access to the marketplace is easier and cheaper than ever since setup for 3G internet access can be accomplished on the device itself, requiring no long-term contracts for subsidies, no intervention or assistance from cell-savvy personnel,  no activation with a desktop computer (like EVDO modems). AT&T might opt to sell them with subsidies and contracts, but options are now available.

An interesting twist on consumer trust and value propositions in a digital marketplace: ownership is not necessarily tied to possession of a physical thing.  If someone steals your iPod, you still “own” all the goods you’ve purchased (Apps, songs, books).  You can put them right back into use for the cost of another device. You can’t say that for a CD in a CD-player.  And really, which investment is usually bigger? The songs or the player?  The computer or the software?  The games or the game system?