Don’t buy – sell: how Apple augments revenue

Only a few years ago, Apple was a software company, and we were all worried that the software giants, like Microsoft, Adobe, and Apple, would swallow any innovative competition. They did, for a while, and learned how it was often a costly headache to acquire even quite small software developers.

Many of the best software products are still largely developed by individuals or small, close teams, whose work ethics often clash with the more regulated behaviour expected in large corporations, even fairly relaxed and progressive ones. The code that they bring with them is often only good so long as you continue to pay and nurture those same developers. So many really good products have, as a result, been killed off, or left to graze in a distant paddock somewhere.

This is all part of a series of cycles in software development. In the earliest years, when today’s giants were growing prodigiously in sheds, spare rooms, and cramped cheap office suites, it was different again. With a few lucky breaks, some innovative ideas, and sheer coding skills, many made their first million before it really sank home.

We then enjoyed a period in which the market seemed quite free: there were almost boundless opportunities for those with the talent and endurance. It wasn’t in fact as good as it seemed, as there was plenty of sharp practice too, and a lot of quite big companies crashed and burned spectacularly. Those were heady days, though, when you got a phone call in the morning asking if a team could fly over from Germany that afternoon to discuss a multi-million dollar development project.

The biggest weakness in most small software houses has been in sales and marketing – the front end of the business. Once Apple and others realised how readily they could sell products through their own online app stores, it was only logical to open those to all-comers. By charging a percentage of product sales for their payment and delivery services, required for their own products anyway, Apple and others have found an apparently foolproof and gold-lined solution: don’t buy the developers or their products, but sell those products for them and take a decent cut in return.

And return is the word: in the last quarter (fiscal 2016 third quarter), Apple’s revenues from app store, Apple Pay, and other services grew year-on-year by 19% to nearly $6 billion. That is about the same as McDonald’s average quarterly revenue for its entire operations worldwide (on over 36,000 sites) during 2015, and is similar to Adobe’s entire annual revenue. Apple is now making more from sales of apps, content including music and movies developed by others, and other services than it ever made from its own software, without so much as lifting a text editor.

Software and content developers are never happy when others profit so handsomely from their ingenuity and hard work. But given the choice between being separate companies dependent on Apple for sales and delivery, and seeing their products bought up and vanish inside a huge corporation, I know which I’d prefer. It may not be why you sit and code for days and nights without sleep, but it doesn’t steal your dreams too.

There is an unfortunate side-effect, an unintended consequence: Apple is not really interested in developing its own apps any more. Until the runaway success of the iPhone, there was a long ongoing debate as to whether it was a software or hardware company. With all the different hardware it now sells, that debate is well and truly settled: no software company sells a billion iPhones.

This is good for the independent developers, who know that they have to be very unlucky now to end up competing with Apple. Apps like Affinity Photo and Designer still have to compete against the likes of Adobe, but that should hardly be difficult given the latter’s pro pricing and licensing models.

So if you’re looking to Apple to come up with the next version of HyperCard, or turn Photos into something comparable to Aperture, you’re most likely going to be disappointed. Apple is now focussed on selling hardware and new subscription-based services, not offering the largest portfolio of its own serious and innovative software products for OS X.

Mark Tim Cook’s words, that Apple has recently been investing heavily in unreleased products and services. (My emphasis.) I’ll take bets on those services making even bigger comfortable profits from the creativity of others. Not that there’s anything wrong with that, and iTunes and App Stores have plenty of encouraging success stories.