Apple‘s recent purchase of mobile ad network Quattro Wireless may signify a much more significant shift in Apple’s business model than it would otherwise seem.
So, why did Apple buy Quattro (Apple earlier sought to buy market-leader AdMob, but ceded the purchase to Google once the price became too rich)? Apple has always focused on providing well-designed, tightly-integrated software and hardware to customers willing to pay a premium for these qualities. The focus has always been profits over an indeterminate quest for market share and that strategy has proved very durable. With that in mind, my guess is that Apple will initially use Quattro to better monetize the large number of free apps (perhaps 9:1, free:paid) in the App Store. While free apps help iPhone/iPodTouch sales by making the devices more useful, Apple’s 30% take on free app sales is still $0. Beyond iPhone/Touch, being able to monetize content via an ad-supported model will become more important as publishers begin to distribute content on the iPad. While the iPhone/Touch/Pad SDK enables app developers to charge for incremental purchases within apps, Apple will need an ad platform to satisfy the needs of various publishers, particularly on the iPad. These are all practical tactics that make a lot of sense in the context of Apple’s strategy to monetize “closed” platforms that benefit from tightly integrated software and hardware.
Apple’s critics have faulted the company for not being more “open” with the iPhone/Touch/iPad OS (“open”, meaning device agnostic, with no app approval process). Critics say Apple is making the same mistakes today as it did during the OS wars. The battle then was Apple’s “closed” model that exclusively paired Apple software to Apple hardware, versus Microsoft’s decision to allow its software to run on any hardware device (with certain controls). We all know the result: Microsoft has something like >85% of the OS market vs. ~10% for Apple. The argument is that Google’s “open” Android platform will eat Apple’s lunch just as Microsoft did, and Apple will be relegated to distant second place in mobile.
Others argue (using Clayton Christensen’s theory) that Apple does not need to open up since customers will continue to value higher-performance mobile devices over lower-priced commodity ones for the next decade or so. It’s hard to argue against this, but it is difficult to time innovation to anticipate customers’ needs, especially when you’re targeting global markets each with unique demand. More importantly, the competitive attribute may not be device performance, but app costs (i.e. look at the substitutes: free turn-by-turn GPS on Android vs. $59.99 for TomTom‘s US GPS app on iPhone). Couple this with the fact that the iPhone’s gross margins are decreasing and that iPhones account for more than 30% (!) of Apple’s ’09 Net Sales, Apple may be in a tighter spot sooner rather than later.
Before Quattro, Apple’s mobile business model could not compete with Google’s ad-based model because Apple’s incentives to sell more iPhones and paid apps simply did not enable it to do so. Google benefits from an open platform because it gives Google broader reach to sell more ads. More importantly, as Bill Gurley points out, Android offers a “less than free” business model to carriers that want to license Android. Carriers that license Android split ad revenues with Google, so instead of carriers paying to license an OS, carriers are getting paid to use Android. And with traditionally expensive apps such as turn-by-turn navigation becoming free on Android (ad supported), it will be difficult for Apple to continue making money off of app sales commissions.
While Apple has remained “closed”, the Quattro purchase will enable the company to pursue a more open strategy that would enable Apple to benefit financially (ad-supported) from ubiquity. A more “open” system would allow the iPhone/Touch/Pad OS to run on non-Apple hardware (managing this ecosystem would be more complex) and enable developers to launch apps more easily. Of course, this would go entirely against Apple’s long history of tightly integrating its hardware to its software, but Apple has done 180’s before (Perhaps in a calculated way. Jobs once said something like, “nobody will ever want to watch video on a small screen” before they launched the iPod with video). The decision to open up would look highly unlikely in the context of Apple’s recent decision to remove certain adult-themed applications from the App Store. Nonetheless, while Apple is rightfully focusing on getting its phones on more carriers worldwide, Quattro Wireless could be the genesis of a more “open” (but bet-the-farm) strategy at Apple.