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Will the Apple Tablet Do for Print What App Store Did for Apps, iTunes for Music?

While there has been much heated discussion in recent days about what Apple plans to announce on January 27, almost all of the comments, some of which are very good and offer intelligent insightful analysis, focus on what Apple is famous for, the front-end user experience.

In this article, I would like to focus on what I think is just as important but talked about much less, the business angle for the Apple Tablet. Beginning with the iPod, while Apple focused on changing the consumer digital experience, it has worked just as hard on changing broken business models, starting with the music industry. In 2001, when the iPod was first launched, many people listened to their music on recordable CDs and CD players. The music industry’s major labels had fought and won against Napster, but the digitally savvy were distributing songs and music for free on the Internet.

Then Apple updated iTunes, and continuously added more power and features, first on the Macintosh platform for its loyal user base, then when it had reached a degree of stability, pushing out to the dominant Windows platform. At the same time, Steve Jobs negotiated with the music labels to get them to accept music sales for .99 per single song. There was strong initial resistance to this because the labels were used to selling CDs, and even though CD sales were falling, they stubbornly stuck to this model. That is, until reality stepped in, and someone had to point out the obvious, after which one broke rank and reached a deal with Apple. Then the others fell in line.

Before the iPhone, there was the same problem with applications on mobile phones. Except in this industry, the role of the music labels was replaced by the carriers. As Steve Jobs himself said (paraphrasing him here); they found an industry which was broken and didn’t make sense, and Apple’s engineers came up with a new solution combining a phone, a computer, and gaming device all into one elegant solution based on OS X technology with the Apple interface. The result has been the iPhone which has become popular, breaking sales records worldwide.

It would be all too easy to say that the success of the iPhone is based on device and user experience alone. That would take an oversimplified view of what Apple has been doing since the iPod: it creates new devices which at the same time, create new business ecosystems which increase and diversify the revenue streams for Apple, while making things easier for publishers. The design sexiness means that the new device can sell for a premium price which Steve Jobs (and his shareholders) love, while the backend store and ecosystem builds out, becoming an important distribution point for Apple services and locking in publishers.

I accurately predicted this with the launch of the AppStore for the apps which users can download/buy for their iPhones, giving them the power to customize their phones with their own selection of application software. For developers, the model, while not perfect, is simple to understand: developers set the sales price, and Apple takes 30% for hosting and billing while the developers keep the remaining 70%. The result has been outstanding sales success, even beyond what Apple predicted.

Looking at the book publishing industry today, it is a broken business model. From the author’s point of view, while writing a book is hard enough, the business side is even worse. First of all, in the US, one must find an agent and complete a draft and book proposal. The agent then shops the book to publishers, and then negotiates a deal with the book publisher, which usually involves the agent taking 10-20%. The publisher then may pay an advance (becoming increasingly rare), and then the author is paid a portion based on royalties for the books sold, which is usually 5-10%. The book publisher makes sure that the book is edited and makes its way into the book distribution system (dominated by 2-3 players) which gets it into book stores. However, the author is largely responsible for promotion. To make things even worse, bookstores in the US don’t really buy books; they sell on consignment. This means that they can return unsold books to the publisher, and get a refund, which cuts back even more on how much the author gets.

When you figure all this in, it’s amazing that there are any authors who make money at all! Now, let’s say that you are writing a book on a fast-changing field. In my case, my main subject is China and technology, both of which are fast-changing fields. By the time you go through the whole book publishing process and your book hits the shelves, everything has changed! Information which was current 18 months ago has been completely superseded by changes in Chinese government policy, changes in business conditions and changes in technology.

Please tell me: “How can an industry get more broken that that?” No wonder smart people are choosing to get their information from the Internet in preference to books!

If I were Steve Jobs, I would look at this and say: “If I have a good device which offers superb user experience, leverages off the current Mac user base (which now includes iPhone users), and ties in on the back end with a new business ecosystem which gradually sweeps aside the current broken publishing ecosystem, we might have something.”

Now, in order to make the Apple Tablet a real success, it has to have certain functionality which will not cannibalize iPhone and Mac notebook sales. This is why it’s point of attack will have to be on books, magazines and the publishing industry. It will offer developer tools for Apple’s digital publishing solution. Already there is talk about Apple’s new SDK for this new platform.

My prediction is that this new SDK will make it apparent why Apple has not been friendly about offering Adobe’s Flash access to the iPhone, since Apple’s solution will offer much of the same feature set as Adobe Flash, but will be more tightly bundled in on the front and back ends to the device and to the store. (Steve Jobs likes closed ecosystems where he controls the whole experience.) Tough times for Adobe’s Flash and Microsoft’s Silverlight: all dressed up and nowhere to go.

So what about Amazon’s Kindle, which have already outsold print books in distribution this past Christmas? Ironically, the Kindle will help Tablet sales since many Mac users have held back on buying a non-Apple device, waiting for Apple to come up with their solution. When they see the Apple Tablet, this pent-up demand will be released, because the Apple UI design and interface will offer something to them which the Kindle, in its current iteration lacks. Amazon will get a new competitor for online electronic distribution, which will cut into their Kindle sales and profits.

Speaking to a few book publishers (yes, they still exist), I have heard complaints that they are not able to make money on their Kindle editions; print distribution is still more profitable with them, even though sales are tracking down. Apple and Steve Jobs don’t have to do much to bring them aboard. My prediction is that the business model will be like the App Store offering for developers: “You set the final sales prices, we take a percentage on each sale.”

As for Google, they seem to be focusing most of their efforts on the Google Android platform, which will make inroads this year. This year, Google won’t be able to do much in the publishing field, and if and when Google does enter this field to compete with Apple, they need to undo much of the bad feeling with authors and publishers over copyright which started with Google Books to the point where a Chinese author has sued Google! (Hmmm… What’s wrong with this picture?) This will give Apple at least a two-year lead over Google in this field and Google will have to fight a tough uphill battle when it comes in.

About this time, Apple will be getting into the advertising field. I mean, who is still impressed with small text box ads on their web page, and doesn’t find them at least a little annoying, even though they may be relevant? My guess is that Steve Jobs is thinking about applying some magic sauce to make them better, sexier both for advertisers and content syndicators, and in the process, getting more revenue, and a new revenue stream, for Apple. I find it hard to believe that Apple is investing so much in a new data center without new revenue streams. My guess is that it will include advertising, and if correct, then Google will be on the defensive. It may take the form of a free service Apple TV with ads, and subscription form without ads.

No wonder Steve Jobs is feeling extremely happy, life just keeps getting better and better.




4 Responses to “Will the Apple Tablet Do for Print What App Store Did for Apps, iTunes for Music?”

  1. [...] Apple’s true killer app: disruptive business models January 5, 2010 · Filed Under Uncategorized  Great analysis from Paul Denlinger at The China Vortex about the upcoming Apple Tablet, and what its real impact will be on the market. [...]

  2. [...] the upcoming launch of the Apple Tablet on January 27, the world is getting ready for 2010 to be a year of major change and disruption in digital [...]

  3. [...] of the China Vortex, this would come as no surprise, since we predicted all this about the iPad way back on January 5, before even the iPad name was announced. When AAPL was trading around $215 per share, compared to [...]

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