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Innovative Apple should watch out for app disruption

New app delivery models could disrupt Apple’s plans. kobiz7

The new iPhone 5S features a better camera, a faster processor, a finger-print reader, and much else. These innovations make the iPhone even better than it was before, but it’s still very much an iPhone. It almost suggests that Apple’s strategists do not anticipate the rules of the game to change anytime soon, banking on the mobile market to carry on as usual.

The writing is on the wall, however. Not only do smartphones become harder and harder to distinguish, with price competition favouring firms producing at lower costs, like Lenovo or ZTE. But the way that value is captured in the industry is also about to change. And it is unclear whether Apple will get a look in.

Apple rode the wave of the last market disruption when, a few years back, consumers no longer chose their phones on the basis of technology specs, which increasingly resembled each other, but instead started to choose them on the basis of the applications they could access.

Apple was a major driver and beneficiary of that change, and it offered the best app cosmos. It did not pioneer touchscreens (LG), push email (Blackberry), app platforms (Symbian) and many other features that made the iPhone great. Rather, Apple anticipated a trend and integrated and improved on the pioneering attempts of its soon-to-be competitors. It minted money because of its app store, tightly linked with its operating system, even if actual monetisation was through the iPhone hardware. This strategic insight sent the less prepared lot of handset makers into freefall.

The next disruption in the smartphone market brings yet another change to the way value is appropriated along the mobile value chain. After the lion’s share of profits moved from handset manufacturers to firms that controlled the link between operating system and app store, it it is about to move on to the apps themselves. This is facilitated by new challengers in the operating system domain.

Meet the new crop of open mobile operating systems: Sailfish, developed by Jolla, a Nokia offshoot; Firefox, developed by Mozilla, as in the web browser; Ubuntu, developed by Canonical, a British firm focused on Linux systems; and Tizen, developed by Samsung, Intel, and others. While there are subtle differences between these OS entrants, they all have recognised important trends.

One is that developers prefer to write applications once, avoiding the tedious adaptation to different platform languages used by iOS, Android, Windows Phone, and Blackberry 10. HTML, a programming language from the computing world, holds out the promise of standardisation. While iOS and others increasingly allow for HTML apps, developers are still beholden to customisation and authorisation requirements. The new OS crop largely does away with this, ensuring cross-platform interoperability.

In addition, a next-generation OS like Ubuntu also supports other common computing languages and can run Android apps. This trend points towards an eventual unbundling of the value chain; users will be able to download any app (or link to a cloud app) from any app store (or directly from the source) to any operating system and device (not just phones, but also tablets and PCs). App developers thus no longer have to share as much of their income with powerful middle men. The nexus of operating system and app store will no longer control the rest of the value chain.

This could disrupt Apple’s money-printing machinery, with handset profits no longer underpinned by its iOS/app store advantage. To make matters worse, differentiation solely at hardware level is becoming harder. If the black rectangular touchscreen from Huawei can deliver the same apps and experience as the black rectangular touchscreen from Apple, why should consumers pay a premium? It points to a commoditisation of devices, a process that, in the PC industry, has led to painful consolidation. The iPhone 5C is a first attempt to compete on price, but it is no match for products from emerging-market vendors like Micromax or Karbonn. Price competition also sits oddly with Apple’s corporate brand.

The new disruption is only just getting off the ground; only a handful of devices with the new operating systems are currently on sale. But it could take off quickly. If only one big vendor, say Lenovo, committed to one of the new operating systems, it would boost the whole crop. Mobile operators are also keen to shake up the status quo. And big app developers such as Facebook may start to insist on writing in standard HTML only, leaving Apple and Google little choice but to open up their app stores.

Most market disruptions start small and are overlooked by established players as they are busy perfecting their approach to business as usual. By the time they notice, it is often too late. Investors, however, have high expectations. If any company is nimble enough to avoid such a fate it is Apple, who, after all, has a record of anticipating market disruption.

So where should Apple turn? Apple provides hardware and software, much of it tightly integrated. As regards mobile hardware specifically, it would benefit from finding areas of differentiation outside the smartphone. Wearable electronics are an interesting growth area, ranging from watches to glasses (to implants?).

On the software front, it would be well-served to harmonise operating systems across phones, macbooks, and other devices, providing a more seamless access to the Apple environment that consumers value. This convenience would continue to motivate consumers to stay with the Apple brand for all their device needs. As long as consumers can access all the apps they want, that is, not just those on Apple’s app store (on PCs, Apple already allows app downloads from other sources).

Conversely, there is money to be made from selling some of Apple’s apps to non-Apple devices. Many non-Apple users might appreciate such classics as Papers or FaceTime. This approach has served the company well in promoting iTunes, for example. Even its operating system could be extended to non-Apple phones.

The mobile industry is notoriously fickle and there is little time for strategic inertia, even for Apple. The company still has ample strategic options. Expect the next product launch to look quite different.

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