Apple Doesn't Want Your iPhone App to Make Money

There’s no doubt that Apple is an incredible marketing machine. Nothing demonstrates that better than the hype surrounding the recent iPad launch (actual Newsweek cover here). When my dad has read more about a new product launch than I have, you know they hit it out of the park.

So it’s no surprise that Apple has also done an amazing job of marketing its App Store to developers as the next great software product platform. The conventional wisdom is that a lot of people are making a lot of money selling apps in the App Store. And Apple has worked pretty hard to encourage that conventional wisdom. So strong is the impression that giant pots of gold await talented app developers that they are willing to put up with abuses like poorly-explained app rejections, hypocritical “policy” enforcement and, most recently, small but significant changes to the iPhone Developer Program License Agreement.

And why wouldn’t Apple want every developer to believe he or she can get rich with an app in the App Store? Apple absolutely needs developers to continue producing apps for the iPhone, iPod Touch and now the iPad, because the strength of Apple’s device sales depends critically on the strength of the App Store, and Apple makes its money selling devices. The importance of the App Store is evident in Apple’s primary iPhone ad slogan, “There’s an App For That.” So anybody who believes Apple’s meteoric rise in mobile computing hasn’t depended on the App Store is kidding herself.

The trouble is that apps and iPhones (or iPods, or iPads) are complements in the economic sense. The iPhone is dependent on apps for its continued success and apps depend on the iPhone’s continuing popularity for theirs. And anyone who’s read Joel Spolsky’s “Strategy Letter V” can see where this is going. When you’ve got a product in the market, you want to commoditize your product’s complements. That is, you want to find ways to make complementary products as cheap and ubiquitous as possible.

Apple is no exception. Rest assured they are thrilled with the more than 185,000 apps available in the App Store. But they are even more thrilled that so many are free. A continuous supply of cheap apps ensures that iPhone users can find pretty much anything they want (except Google Voice), so they continue to be happy with their device, ensuring that they will recommend it to friends, thus driving more iPhone sales.

Apple wins big in this situation; developers, not so much. Because Apple’s incentives aren’t entirely aligned with developers’ incentives. Yes, both want to see iPhones and iPods in as many hands as possible. But app developers want to make money, and Apple benefits most when they don’t.

So if you’re an App Store developer, of course Apple wants you to believe you can make a bunch of money there. And if you are one of the few, that’s great. Milk it while you can. Because rest assured Apple is hoping a cheaper version of your app will appear. And you never know when it might take a more active role in encouraging such an outcome.