Corvus Consulting

About six weeks ago Apple kicked out a little preview party for the iPhone’s upcoming 3rd anniversary, complete with a big slice of Beta Cake for app developers. Most commentary so far seems split between speculation on somewhat vanilla, incremental hardware improvements and the overdue-ness, the zomg-ness of the decades-old desktop computing staple: Cut+Copy and Paste.

Copy and Paste is good to have. Its absence hasn’t bothered me much, but that’s me and I recognize it’s a pain for many, especially around URLS (though the explosion of shorteners, midwifed into necessity by Twitter, alleviates that). And the way Apple is implementing the feature in a touch-screen looks good in the video.

Engadget offers a tidy marquee feature list:

Besides adding oft-requested (and much needed) copy and paste functionality, the company also tacked on MMS, A2DP (stereo Bluetooth) support, peer-to-peer connectivity, unlocked Bluetooth support for the touch, and a brand new global search called Spotlight.

What I think reviewers are missing can only be seen when the iPhone is viewed part and parcel with the iTunes App Store and the changes coming with 3.0. Those changes, I believe, will have 3 big outcomes:

• Halt the ghettoization of the App Store as one ruled by the $0.99 price point, and radically tidy up the inventory to make app discovery and browsing much easier.
• Expand App Store revenues with a massive opportunity for developers to generate new and ongoing sales.
• Neutralize the threat posed by Amazon’s Kindle ebook reader by turning it into an Apple product.

The short version of why: iPhone 3 makes every app a potential store. Here’s how.

Pre-3.0: One Store, One Way

After some 6 years online the iTunes Store (iTS) retains laser-like focus on one core, two-step interaction pattern: browse and buy, all through the store. If we consider previewing a music track or video clip part of browsing, then there are no other actions to take, other than reviewing.

That core pattern thrives through every type of content the store offers, but creaks with the addition of the App Store under the weight of specialized scenarios common to software, but alien to ways of the iITS:

• Try before you buy. A clip preview works well for music and video, but falls down with applications.
• Variable content. With music and video, you buy your item and then you have it. It doesn’t change or update over time, though that would be interesting if it did.

These limits damaged the ecology of third party software around the iPhone platform in two ways: First by requiring that developers create and manage multiple versions of applications to support trial modes and to sell content through applications like ebooks, language phrase-books, newspapers and games. We now have a messy iTunes App Store, exemplified in the screenshot to the right of an RSS feed for new applications added to the store. Each entry is the same point update of an app, but with different content.

The clutter led some developers to feel forced to compete on price and marketing, driving prices down to $0.99 for something the developer feels is worth more. Craig Hockenberry penned an open letter to Steve Jobs last year that summed up the challenge facing Touch platform developers if the App Store couldn’t evolve.

Let a Thousand Apps Bloom (with Stores Built In)

That’s the old way of the iTS, and iPhone 3.0 brings the change: Content and feature-unlock purchases can occur within the app itself, without a trip back to the iTunes store but still using the same store account, password and billing information. Third-party apps can each become a mini-store, nicely tied into the existing purchase mechanism which brings Apple 30% of the sale. Let’s apply that to the three claims I made earlier.

Claim 1: Better Browsing Ends Ghettoization

By consolidating trials and extended content or features into single applications, the App Store will be able to shed hundreds if not thousands of nearly identical applications. For customers, no return trip to the store will be necessary to get a full version (as with games), or another flavor (as with phrasebooks) or to expand what is already in the app (game levels, pro feature unlock, etc). Better browsing is better buying.

Regarding price, applications will still end up at $0.99 but won’t require developers to make it up on volume. Instead of a once-and-forever price, the .99 point becomes the entry-level, and how much money the developer can get from a customer after that point will depend on how well the content delivery is architected. On the device side, multiple versions of an application can consolidate into one, making for a cleaner state of affairs both on the screen and in memory.

Claim 2: Gold Rush!

The ability to purchase at the moment of desire is something of a holy grail of mobile ecommerce because it can almost immediately close the loop between consideration and making the sale. Within each app is the potential for a mini-store, with a buy button and payment processing already handled by Apple. If the iTunes app store is a gravel road for developers now (a gravel road doing a million a day in business, mind you), 3.0 will pave it and add an instant on-ramp for content license holders to sell their wares. Directly. As we know with music, customers will buy online content it treats them like customers and not rats in a Skinner Box.

Speaking of music… We’re already seeing band-specific applications on the iPhone, delivering minimal but branded experiences to fans. The first I saw was the groundbreaking Presidents of the United States app (iTunes link) that delivers 4 albums in the app. Imagine that, then think about how the app can sell music directly (though getting the ipod app to recognize music purchased via third-party apps might need a couple of point revisions).

Apple would ban that in a heartbeat, you might think. It competes with the iTunes Music store, right? No! This would not undercut sales in iTMS, but both shift and multiply it. Apple doesn’t make much on music sales, but with the apps doing the selling they could take their standard %30 while still leaving more for the band, can sell direct. Who gets hurt? The labels. I’m waiting for tears, but only hearing music, happy music.

Claim 3: Kindle in Carbonite

Have I given my refrain for Kindle yet? It goes like this: Oh Kindle, how you tempt mine mind with limitless reading across the airwaves only to burn my eyes with thine ugly screen and hardware keyboard?

Clearly I have some strong, unresolved feelings about the Kindle, mostly around its hardware design. That’s another post for another time. While it’s a long way off from being such, the Kindle could have been a contender for the market that the iPod holds, if it were to suddenly, say, play MP3s bought at Amazon, and allow shopping for the various physical goods they sell. Who knows what’s in your Gold Box while you’re on the road, but with the Kindle you could find out and maybe score a good deal. Though you wouldn’t know the box is gold on that screen. Again, strong feelings.

Amazon has already released a Kindle app for iPhone, and recently bought the Stanza ebook reader which has a great flow for moving content between desktop and device. Amazon clearly sees the iPhone as an opportunity, though I’m unsure of how they feel about getting only 70% of what they’d make on a Kindle-based sale. With iPhone 3.0, the Kindle services can play for those who don’t want to carry an extra device or aren’t wooed by the Kindle’s hardware strengths, and Apple can keep the Kindle frozen into a niche space, like Han Solo in carbonite complete with his bronzed look of shock. If the rumors of a Touch-based media tablet from Apple this year are true, the Kindle as a hardware item can be retired and Amazon can continue making an ebook marketplace a reality without having to stray outside its core competency.

It’s a Big Deal

Selling through third-party applications in iPhone 3 both sets free and retains Apple’s control over the iTunes Store. By treating it as a service that can thrive in a distributed form and not obsessing over whether customers are visiting their property to shop, Apple is turning a money hose into a very big wave with finesse and thoughtfulness. But that’s not what’s getting the headlines right now, it’s copy and paste. And speaking of that copy and paste thing, one must wonder how the Android, Zune and Blackberry platforms will change their stores after 3.0 drops.