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Why the App store is so valuable to Apple’s business strategy

Anuj Bhatia
Apple’s services revenue for the September 2019 quarter reached an all-time high of $12.5 billion, up 18 per cent year over year.

A decade ago, Apple launched the App Store, an online destination where iPhone users could download applications from third-party developers. The App Store not only changed the way we used smartphones but also created new businesses like Spotify, Uber and Instagram. But as Apple is in the midst of transforming from a hardware company into a services company, the App Store is seen as the backbone of the company’s services business.

“Apple has been able to create a brand loyalty, affinity and stickiness through good apps,” Gabriel Appleton, co-founder of Vumonic Datalabs, a data analytics company, said in a telephonic interview. Gabriel told indianexpress.com that Apple has been able to build its consumer services around the App Store and that makes them different from competition. Developers, he added, have also strengthened the App Store.

Apple’s services revenue for the September 2019 quarter reached an all-time high of $12.5 billion, up 18 per cent year over year. The company’s services business includes following verticals: the App Store, sales from the iTunes Store and Apple’s digital book store, as well as subscriptions to Apple Music, Apple Arcade, Apple News+, and Apple’s recently announced streaming TV service.

The App Store, sales from the iTunes Store and Apple’s digital book store, as well as subscriptions to Apple Music, Apple Arcade, Apple News+, and Apple’s recently announced streaming TV service.

The service business is crucial for Apple’s future growth, something CEO Tim Cook has acknowledged on many occasions. But to increase its services business, Apple needs the help of the App Store to sell services and subscriptions. Think of the App Store as a gateway to the Apple Arcade, a new game subscription service that offers unlimited access to 100 exclusive games for Rs 99 per month.

Forrester vice president and principal analyst Thomas Husson agrees that the App Store is still relevant to Apple. “Beyond the direct service revenue generated for Apple, it is a loyalty ecosystem that augments the value of Apple smartphones and creates a premium for the brand,” Husson said, adding that “the App Store is a glue that sticks together Apple products with brands and consumers and this is a key element of Apple’s strategy”. Husson is of the opinion that Facebook and other digital platforms have to use this distribution mechanism to reach hundreds of millions of customers.

In the first three quarters of 2019, 91 billion apps were downloaded from the Apple App Store, Google Play Store and other third-party Android stores, according to the data provided by mobile data and analytics provider App Annie to Indianexpress.com. Out of the total downloaded apps, nearly 30 per cent came from the App Store. And on an average 2.5 billion new apps are downloaded from the App Store on a monthly basis. These numbers are impressive, because these are new downloads and do not include re-installs or app updates.

From a strategy perspective, Apple would want to capitalise on the popularity of the App Store. There are more than 2 million apps available for download and roughly 1.3 million of them are designed for the iPad as well. And close to 500 million users from 155 countries visited the App Store each week in 2018. As of WWDC 2018, developers had been paid over $100 billion over the lifetime of the App Store. According to analyst firm App Annie, the app economy will be worth $6.3 trillion by 2021.

India could be the next big market for Apple

Given the current size of the App economy and the number of smartphones sold worldwide every year, the App Store gives an opportunity for Apple to tap into new markets like India, which is yet to be explored fully. In the past two quarters, Apple has emerged as the top premium smartphone brand in India. Indian users downloaded over 14 billion apps from the App Store and Google Play Store in the first three quarters of 2019, according to App Annie. Even though 98 per cent of apps were downloaded from Google Play Store with 2 per cent of downloads coming from the App Store, the App Store accounted for 45 per cent of consumer spend in India during the first three quarters of 2019.

This shows that iPhone and iPad users in India are downloading both paid and free apps in large numbers. Apple’s tight quality control on both the hardware and operating system, along with the system of verifying apps before they are allowed into the App Store, actually allows Apple to create a high-quality app ecosystem.

Premium app users help developers

For developers, access to small yet valuable users is extremely attractive. Gabriel says the numbers a developer get through the App Store is definitely less compared to the Google Play Store. The cost for an app being installed on iPhone, in some cases, could be three times higher than that a Play Store. That said, developers are aware that the App Store is superior and the iPhone is a premium device. The effort is worth it- after all, they are getting access to those users that are willing to pay for apps.

The App Store is a showcase of first-party apps

Knowing the App Store’s potential and reach, Apple has been promoting its first-party apps on the store. Many of its apps rival the competition like Apple Music and Measure, though the company has faced criticism from antitrust regulators over its preferential treatment to its apps. Many iOS developers have also called the App Store a monopoly. To get an app approved, iOS developers have to follow Apple’s lengthy guidelines and rules and the company can block certain apps that violates its rules.

Many of its apps rival the competition like Apple Music and Measure, though the company has faced criticism from antitrust regulators over its preferential treatment to its apps.

Gabriel too said the Apple App Store is notoriously more stringent on its policies than the Play Store is. “And this is one way that Apple has become an enemy. But I also think they’ve kind of been able to retain an air of sophistication. For example, our app InstaClean is the first app to fight air pollution, something that is super important for India currently. The Google Playstore instantly approved it, but for the App Store, it took weeks of back-and-forth".

“I think this goes back to kind of like the Apple brand of controlling the quality almost to a rigorous standard. Whereas Microsoft and Google have a more kind of modular brand, Apple is a closed environment, and they've kept that in their app store as well. So the amount of data that's able to be accessed from the end-user is also something that is different between the App Store and Google, Play Store” Gabriel added.

Collaboration with third-party developers still important

It is quality apps that have helped Apple create the App Store and its success. Without the App Store, there would be no app economy, no Spotify, no Uber and certainly no WhatsApp acquisition by Facebook.

When mobile games were referenced in TV and movies, Angry Birds would be the first example.

Rovio, the Finland based gaming studio, had been developing games for feature phones for years. But its big break came in the form of Angry Birds, which went on to become the most popular casual game of its time. “Angry Birds has always been known by their iconic characters, and that’s where the whole game began. The first Angry Bird was brought to life in a rudimentary sketch by designer Jaakko Iisalo. He saw something fun in the character and shared it with the team, who also liked what they saw. A core team of four people went about creating a game around these characters, and after eight months of development, Angry Birds was born in 2009,” reminisced Ville Heijari, Chief Marketing Officer, Rovio Entertainment.

“When mobile games were referenced in TV and movies, Angry Birds would be the first example. The App Store played a significant role both in terms of Angry Birds’ instant adoption and long-lasting success, but it wouldn’t have gotten off the ground if it wasn’t a great game,” Ville added.