The build a platform and squeeze business model

A business model that excludes competition, reduces consumer choice, and creates monopolies is the anti-thesis for free markets, but this is exactly what threatens both software and the distribution of media (ebooks, video, and music) over the internet, and much more.

Imagine how outraged people would be if Microsoft altered Windows to only run software purchased through MS. Now imagine that they went further than tried to take charge for every thing that was read, watched, or listened to on every Windows PC?

This is exactly what Apple have been doing with iPhone’s and iPods. Software can only be installed through Apple’s own “App store”.

Now Apple have prevented ebook reader apps (i.e. software) like those from Amazon and Kobo from directing users to buying ebooks from those companies websites: all purchases that apps promote (or made through apps) must be made through apple.

Apple have done what I asked you to imagine Microsoft doing. With both Apple and Microsoft planning app stores for their PC operating systems (i.e. MacOS and Windows), we are likely to see this spread. It is unlikely that the app stores will initially be the only way to install software, but once the mechanism is in place, it is likely to get locked in.

Its worth pointing out that Linux has had the benefit of app stores (sans payment mechanisms) for a decade, but without the vendor control. Apples innovation consisted of doing what Linux does, in a technically inferior and less flexible way (no dependency handling), but integrating the payment mechanism.

It is not just an operating system that can give you this basis for making suppliers of stuff for your platform pay. What Apple is doing to Amazon, is exactly what Amazon is positioning itself to do to authors and publishers. Amazon already takes a substantial proportion of the retail price of an ebook (30% of what is left after deducting a distribution charge), a huge amount for essentially listing the book on a website and handling a payment. This is more than the author typically gets for doing the hard work. As the Kindle’s market position goes stronger they will be in a position to increase this if they wish.

Facebook now requires game developers to accept Facebook credits for in-game payments. Again, this means Facebook keeps 30%, a lot more than the game developers ever had to pay normal payment processors (sounds familiar).

The common strategy is this: you build a platform, people build applications or content for your platform, and you then charge them for the privilege. They are already committed, and you control access to the users giving you a monopoly over selling to those users.

Telecoms companies attempts to charge websites that their customers use (ending what is called “net neutrality”) is a similar strategy. You own the customers and charge for access. I suppose we should count ourselves lucky that they are not charging businesses that want to receive phone calls from their customers).

Ultimately this is about controlling customers. You lock the customers into your platform. The software industry has long done this, but limited its exploitation of it to selling upgrades. Now, this control can be exploited in many ways. You have a group of customer to whom you are a gatekeeper: its like owning all the shops in town, but without the pesky attention from competition authorities that doing that would attract.