Last time we covered gave an overview of what we understand under hardware / software platforms.
We also covered the differences between the linear business model and the platform business model.
Apple is using both business models in many forms and areas of their business.
We will cover both in this article and will see how the platform business model can be used to make what we are selling through the linear business model (much) more valuable.
This is part 2 of our hardware / software technology platform business model series.
Note that we cover the related field of Software-as-a-Service in a separate series because of the big differences in their business models.
Apple: linear & platform business model
Apple is just the best example for the power of the platform business model.
Embroiled in a fight with Microsoft in the 70s/80s, Apple chose to keep their operating system closed to 3rd party software. It proved disastrous and was at the core of their defeat.
The Apple Lisa leveraged only the linear model and the linear model without an ecosystem.
Early DOS-based PCs had hundreds and later many thousands of pieces of software, games and hardware components.
The Apple Lisa had 7 pieces of software all created by Apple.
No ecosystem = no sales
This equation held true even at the time (and more so today). In today's age, everybody knows that without an ecosystem you will not fare very well.
Microsoft had an ecosystem but bhey did not monetise on it in all the ways that we know today.
Microsoft (as well as game consoles) monetised through one-off sales of their software / hardware.
However, the ecosystem that they built greatly boosted their sales even though the business model - from a monetiation perspective - was the linear model.
History was going to repeat ... almost
Fast forward some 20-30 years, and the events were going to repeat ... almost.
In 2007 the iPhone 1G was released. And it came without the App Store. Steve Jobs’ plan for 3rd party software was that they would have to use the Safari browser.
According to tech observers and Steve Jobs’ biographer, Jobs changed his mind on this due to developer protests and announced a Software Development Kit and the App Store.
It came in mid 2008, almost one year after the 1G iPhone. In reality Jobs must have also feared a repeat of history.
Google had already identified a risk to their search business from internet traffic shifting from desktop to mobile.
- And they had acquired Android - an operating system for mobile phones - in 2005.
- In 2007 they co-founded the Open Handset Alliance together with many of the biggest handheld manufacturers at the time when Android was unveiled.
- The first Android-powered mobile came out in 2008 and many followed over the coming years.
Steve Jobs probably feared - rightly so - that their competitors would build a valuable ecosystem that would outdo the iPhone as did DOS with the early Mac computers.
Once again he would have had the slicker, more expensive device with a relatively small ecosystem.
The iPhone and smartphones in general generated revenues exceeding the wildest dreams of their creators.
A lot of it can be credited to the ecosystem.
Some analysts argue that the iPhone got Apple to their first trillion market cap valuation and the service revenues to their second trillion valuation.
"Along with Apple’s growing revenue from its services and its reported plans to launch various subscription bundles later this year, this shows how the iPhone maker’s future depends not just on its hardware, but on the software that keeps customers loyal. The iPhone got Apple to $1 trillion. Services, arguably, got it $2 trillion. What can keep it there?" The Verge
Certainly expectations for this type of revenue are very high.
It constitutes a diversification strategy for revenue generation.
With this we have 3 major monetisation models:
- Sales of the underlying hardware / software platform. I have described this in the previous article. This is also how Microsoft monetised their DOS and Windows OSs. The revenue from the sales of the iPhone hardware unit makes still the largest revenue for Apple. But a strong the platform boost sales of the underlying platform.
- Taking commission on sales of the software/apps sold through their app store. This is the big thing that has changed. Apple now takes a cut on any app sales including in-app purchases and subscriptions. And it is a remarkable 30%. This also includes subscriptions. If someone pays for a subscription via an app, Apple will take a 30% cut of the fees of the first year and 15% in subsequent years. Google does the same for apps in the Google Play Store.
- And of course sales of their own subscriptions. Note that some of these may be classified as a linear model (e.g. Apple Fitness+), whereas others are a platform business model (e.g. Apple Music). Apple News+ is a knife-edge case but more in the platform business model space. You can learn more in our course on what exactly the differences are.
You can see these monetisation models in the layer diagram. It shows the hardware and software layers involved that are relevant from a business model perspective.
The big thing from a technological perspective is of course to develop all of this. But on the other hand you can also see that you can understand a tech business model without being a techie.
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Other hardware / software tech platforms
Of course, Apple is not the only hardware / software technology platform who uses these monetisation models.
Game consoles are following a similar model though its more complex overall with different partnering agreements.
Sony is reported to take a 30 percent cut from games sold in the PlayStation Store, though the split isn’t publicly disclosed.
Microsoft takes a 30 percent cut from Xbox games and in-game purchases sold through the console’s store.
And more imponrtantly, go back to our previous article with the overview and examples of other hardware / software businesses and you will find that they all follow this playbook.
Vertical integration is not a necessary condition
Not all of them are fully vertically integrated like Apple or game consoles.
In the next article we will see more approaches, including those that monetise without owning all layers of the technology stack.
We will see many other ways to monetise.
You may have come here trying to find out something specific. But the truth is that any specific information is connected to a lot of other details.
We firmly believe that it's worthwhile to learn the bigger picture around the knowledge that you have found in this article.
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