Has Apple Done it Again?

Let me start out admitting I’m a total Apple homer. I worked at the fruit company a digital lifetime ago but still consider it one of the better jobs over my 20+ year career. While I still haven’t broken down and bought an AppleTV I’ve certainly pacified my fetish for Apple gear most recently with an iPhone 3G. Over the past week I’ve started to ask myself the question, “has Apple done it again?” Has Apple reinvented the software business the same way it did for music?

We all know the story about digital music and the iPod. I’m sure there are many angles to take on this one; the piracy story, the compression story, the record-label view, the artist view, the consumer and on and on, but I think it’s easy to argue the iPod saved the music industry. Yes, musicians and their handlers hate to admit it, but I know more people who, after buying an iPod, have bought more music than they had on their own without an iPod for years - or in my case decades. A buck is easy and often times it’s an impulse buy. How else can I explain buying The Knack’s “My Sharona”? (If you didn’t graduate high school around 1980 you won’t get it). It also helps the model let’s you buy only exactly what you want – not the industry-preferred packaging of albums.

And another funny thing happened. Today, even a good many of the teens I know are going legal as opposed to downloading ripped music from illegal file sharing sites. Apple made it easy to be legal, provided value over a free download with things like cover art, and simplified the process with the iTunes store and gift cards. What’s the standard birthday gift for a teen these days? A gift card to the iTunes store.

I can still hear the music industry complaining – but I ask, “where would they be without the iPod?”

So let’s now turn our attention to the computer software industry. Today, MS-Office withstanding, most folks rarely buy software these days. More and more free shareware and web-based tools are becoming available online so dropping more than $20 on an unknown feels like a real gamble. I know the velocity of the packaged software industry of 2008 is radically different from a decade ago.

In some ways you can see parallels between the historical software and music industries: (1) their packaging strategy is customer-hostile, (2) market consolidation was bad for consumers and (3) they both have unnecessarily long (non)value-add chains. Let me explain.

Both industries have pursued a packaging strategy that is customer-hostile. To buy the single song we wanted, we had to buy the entire album. Similarly, in the software business to get the 10% of a program we really need we have to buy 80% we don’t want and will never use. Of course this strategy was pursued to increase margin through perceived value: the hardware delivery cost for one or ten songs was the same so why not bundle a bunch of stuff together and charge more?

More and more, there are only a few big record labels just like software vendors. Once you get past Microsoft and Adobe who else is out there? And what do they do about packaging? You can hardly afford to buy a standalone version of their products since bundling makes them more attractive. Fewer market-makers leads to fewer choices which means bigger profits for those who are left.

And finally, both industries built a wide chasm between the “artist” and the “buyer”. The infrastructure necessary to successfully run a package software business, or that of a record label are sizable. You have distributors and resellers to pay-off. You have gatekeepers to the market like radio stations and product reviewers. You need to market, sell and support these complex products and supply chains; and of course, everyone wants to get paid along the way. In the end the artist or developer got whatever was leftover.

Now, last month, we get the $0.99 software program – enter the App Store for the iPhone. It was an epiphany for me. Here on my phone, while I’m idling away a spare five minutes someplace I can find a little “one-hit wonder” of a software program, download and pay for it in a matter of seconds all for less than the price of soft drink at my local convenience store. If it doesn’t work out, so what? It was only a buck. Shamelessly I have to admit it, I have purchased more software (for me, not work) in the last week than I have in the last five years. And I love it.

Has Apple done it again? Did Apple reinvent the software business? We’re not even close yet but I see the signs pointing an interesting direction. What does it mean for ad-based business models? What does it mean to software development overall? Do we just go and build really tightly targeted apps and sell them for a buck with the developer keeping 70 cents on the dollar for each product sold? Why not? Hmmm… gotta run and go download the iPhone SDK.