Apple shows developers the money

Earlier today, Apple unveiled its iAd advertising platform as part of iPhone OS 4. Over the next couple of days pundits will rail about Apple competing with Google in advertising. As I explain in the previous post, "Clash of the titans: Apple, Google battle for the open Web," there is a more fundamental, worldview war underway. Apple isn't trying to compete with Google so much as make its mobile platform more appealing. The right approach is simple: Make lots of people rich.

Apple is building out a mobile platform around iPhone OS and extended services. There are right ways to make a platform more appealing, and Apple did just that with today's announcement. Successful platforms share five common traits:

1) There are good development tools and APIs for easily making good applications.
2) There is at least one killer application people really want.
3) There is breadth of useful applications.
4) Third parties make lots of money.
5) There is a robust ecosystem.

The fourth of these characteristics is the most important. No matter how good the platform, third parties will only support it if they can make money. The classic competing example is Apple versus Microsoft in the 1980s and 1990s.

Apple retained tight control over its operating system, while Microsoft licensed DOS and later Windows. Microsoft's approach allowed a huge ecosystem of hardware manufacturers, resellers and software developers to make money. Large businesses saved millions of dollars deploying PC hardware and software (instead of mainframes and terminals) and later generated revenue from new business processes and efficiencies. More third parties made more money supporting Microsoft's platform than Apple's. It's the fundamental reason why the Macintosh lost the PC wars in the 1980s and early 1990s.

There is a sixth attribute that follows the other five: Scale. Once there is enough third-party support, the platform and extended ecosystem rapidly scales, such that it's like a tsunami washing away any competitors. From that point, there no longer is choice. Developers will create software and consumers and businesses will buy into the platform. More for businesses than consumers, there also comes a point where it costs more to switch than to stick with the platform. This describes the state of Microsoft's Office-Windows-Windows Server platform.

Apple's app store/iPhone OS platform is remarkable for how quickly third parties supported it, how rapidly they made money from it and how suddenly there is scale -- at least around applications. The hardware numbers are good but not great, nearly 86 million iPads, iPhones and iPod touches sold combined. There is no single reason for Apple's mobile success although products and services released in 2001 are foundational to much of Apple's late-Noughties gains.

Logistically, Apple started with the same platform approach that failed in 1980s and 1990s but reimaged it for the 2000s. Like Macintosh, with iPhone, Apple maintains tight control over hardware, software and services. But the company did much better offering an appealing platform for developers and mobile device buyers. Something else: No Microsoft monopoly. Apple didn't have to compete with an entrenched incombent on handsets the way it did on personal computers. The phone market is highly fragmented (even among Nokia handsets).

The strategy worked in part by building in a direct mechanism by which developers could make money. Apple provided in App Store ways for developers to easily distribute software, to get paid for their apps and to protect them from rampant piracy. Flipped around, consumers can easily buy, sync and pay for the applications.

Until today, iPhone OS developers sold their applications or gave them away for free. The problem with free is free. How do developers make money from free stuff? With iAd, Apple will provide developers another way to monetize their applications, which will be more important to content publishers like the New York Times or to developers giving away stuff for free.

"These developers have to find a way to make some money, and we'd like to help them," Apple CEO Steve Jobs said during today's iPhone OS 4 launch event.

As I explain in the companion post, built-in advertising isn't direct competition to Google. Apple's iAd is confined to its mobile platform. However, Apple is offering developers even more ways to make money and on a platform already highly scaled. During today's iPhone OS 4 event, Hasan Ahmad tweeted to me: "iAd demo -- All Android developers just packed their bags and went for the iPhone." If he's right, they'll be looking for the money.