Time to get a new completely unfounded rumor out of thin air: Apple is expected to announce the first four third-party applications as well as the SDK for the iPhone at the upcoming World Wide Developer Conference in San Fransisco, California. All these applications will not only be available for iPhone users, but will also be compatible with the iPod touch. And to make it the best user experience, all these applications will be available directly from the iTunes store for as little as $9.99. For the third-party developers: think about the game consoles model.
Yes, there is absolutely no background or insider information available to back-up my crazy theory, so please consider this as a pure fiction. Since the iPhone launch, many have been unhappy with the fact that the iPhone doesn’t have an SDK to enable third-party developers to create custom applications. Clever hackers have been able to reverse-engineer some of the features, provide a solution to unlock the phone and even to create, install and use software without any help from Apple. But user adoption won’t grow any time soon outside of the hard-core geeks and hackers.
In the long run, I believe that Apple will be offering an SDK to third-party developers. But it might actually not come in a format similar to Xcode or Visual Studio, e.g. software that enables you to create more software that you can redistribute without any limitations, except those you add. Instead, the iPhone SDK might actually follow much closer the model adopted by Gaming Consoles. This is a closed set of developer tools only available under non-disclosure and for a fee, that enables to create solutions specifically for that one platform. But even more interesting for Apple looking at this model is the fact that the the hardware manufacturers gets a cut for every game sold… that’s right: Apple already earns money on the hardware, the service as well as on the music and video (at least as the intermediary). Simply extending this to a percentage of the cost of the software isn’t to much of a stretch.
Even better, the distribution mechanism is already fully in place: the iTunes Store. Part of this iPhone SDK, third-party developers will be submitting the software to Apple for approval (hey, you wouldn’t want to have something on the iPhone that can bypass the process, would you?) After quality testing, Apple would post the application on the appropriate section of the store, enabling users to buy these as easily as music or video. And boom, it’s on your iPhone. Apple is only going to take an 80% cut from the $9.99 transaction, and because it is all managed in iTunes, it will automatically sync with the device just like games for the iPod do.
But why didn’t the Cupertino company announce this during the launch even in June 2007. For this model to work, you need to have a strong leverage. Apple already owns the eCommerce experience, from the store presentation to the installation on the device, including a seamless one-click transaction. What Apple is missing is the target market to be attractive to the third-party developers. Just like Sony is able to get more and more game developers to support the Playstation 3 platform with every unit of the game console sold (gamers need to buy 3-5 games for the hardware manufacturer to break-even from what I understand), Apple will gain a lot of strength once it has 10 million iPhone users and just as many iPod touch users one year after launch. Having a potential target market of 20 million users growing rapidly is a very interesting value proposition for very innovative third-party developers, even if he has to give a good part of the price the user pays… if you develop the killer application and get 1% of the iPhone / iPod touch users to buy it, there is a potential for $400’000 if you only make $2 per unit. Oh yes, and Apple would add $1.6M to the revenue stream from the iTunes Store with almost now work… that’s what I call monetizing the user base.