August 23, 2013
By Ludo Collin
With the explosive growth of mobile over the last few years, much attention has been focused on the number of handsets, applications and the key players in the market.
A seemingly overlooked byproduct of the growth is that apps themselves are actually a much bigger disruption than most people think.
Beyond phones, they reshape the entire software and hardware industries, creating a massive paradigm shift.
With this shift, we are facing a disruption comparable to the broad adoption of the Internet. It is happening right in front of us, and it is huge.
Mobile phone sales are already high
Apple has sold in excess of 356 million iPhones by second-quarter 2013.
While Steve Jobs announced the iPhone in January 2007 and the iPhone storm hit the market in June of that year, the app market did not begin for another year, in July 2008, when Apple released the first App SDK to developers, opening the most coveted product on the planet to third parties and, along the way, creating the most vibrant ecosystem ever.
To put things in perspective, that is just five years ago. And in less than five years 45 billion apps have been downloaded.
As of June 2013, there were 900,000 apps available for download on iTunes. Even if you assumed a low average cost of $10,000 to develop an app, if you do the math that means that in less than five years Apple created a $9 billion market out of nothing.
That estimate is solely the money paid to developers to build the apps populating the App Store.
On April 23 Apple announced that it had paid out $9 billion in revenue share to developers. Still that figure does not account for all the free-to-download ad- supported apps - from which Apple does not get any money - nor does it account for Android and Windows apps.
Accounting solely for iOS devices, a $20 billion market created in less than 5 years, is a very low estimate. This is just incredible.
But as incredible as it sounds, the market size is nothing compared to the changes that this new market initiated.
A very simple way to answer whether apps are bigger than phones is to consider bigger-screened devices.
Three hundred and fifty-six million iPads have been sold to date and different apps are being developed for iPhone and for iPads.
In that respect, apps are bigger than phones. But that is really oversimplifying. To fully understand the disruption, we have to ask: What is an app?
It starts with an icon
It started with these tiny rounded corner icons on the first iPhone. These were revolutionary for at least two reasons.
First, you could select the apps in a very natural way.
Second, you could purchase new apps very easily.
In both cases, ease of use was the killer feature. Having all these functions readily available on a single screen was breathtaking.
Phones had been offering all sorts of functions for a long time but never had they been so accessible. These easy-to-access icons on that big touch screen changed everything: functions along with the branding were exposed to users.
Apps were set free, and it became a seamless experience. These very icons became the vehicle to market the very apps they made accessible. They became pervasive on the phone, on iTunes, on the Mac, on Apple marketing materials.
Soon the entire industry, way beyond phones, adopted these icons to convey power through simplicity. They embodied a very specific function. They expressed the can- do approach with the tagline: “There’s an app for that.” And apps started destroying massive, established markets along the way.
Market destruction
Nine months and a billion apps later, the impact of the app economy has started to show.
Apple had forever changed the business model of the music industry by making it easy and simple. It was doing it again with apps.
This time, however, Apple was taking on something much larger, much bigger than music or movies: the entire software industry and the software distribution process.
For those hardware manufacturers whose businesses were based on information-specific devices, the effect was devastating.
GPS manufacturers Garmin and TomTom took a major hit on Oct. 28, 2008 when Google announced that step-by-step directions would be available via Google Maps on Android.
Sony, Sharp and most consumer electronic manufacturers’ stocks are in the toilet because the devices they make, from the music players to the video camcorders all the way to alarm clocks and cameras, all are now integrated into what we still call a phone.
If you look at your phone usage you will quickly realize that the “call” usage, for most, is now only in fourth or fifth position, way behind social apps, news apps, email, text messaging and some games.
The “phone app” itself is being extracted from the phone and opened to the world.
Many people have Skype or other VoIP on their devices so that the standard “phone app” delivered with the phone and working solely with a specific carrier is being disrupted.
It also holds true for text messaging, where native phone texting is being replaced by services such as Whatsapp, WeChat and, of course, iMessage. For the first time, in 2012, carrier-based text messaging usage declined.
By making it simple to distribute and have apps readily available in everybody’s pocket, the mobile device is cannibalizing entire billion-dollar industries. But that is still not a paradigm shift.
Extracting intelligence
What makes the app economy a paradigm shift is that what started on a mobile device is rapidly expanding far beyond these devices.
The intelligence is being dissociated from any device.
The model is changing: what used to be static is now highly dynamic.
Following the model initiated by Apple of an open device served by a huge developer community and a centralized shop for these apps, hardware manufacturers are opening up the brains of their devices to broad communities of developers.
Watches and Google glasses are just the tip of the iceberg.
Take refrigerators as an example. It will be infinitely more powerful to let developers come up with apps for refrigerators than to have a specific brand control these apps.
In the old model, Kenmore or GE would create a series of features for their computer-enabled refrigerators within a closed environment that is highly limited.
In the new model, the app-ecosystem developers can write apps for these refrigerators, unleashing an unparalleled amount of creativity.
Who could have predicted that there would be more than one million different apps to choose from for a phone? Only an open ecosystem can make this happen.
That is the true paradigm shift: the transformation is not limited to phones but applies to every single piece of hardware.
From the GPS system to the fridge, from the car to the house, every single piece of hardware is undergoing deep transformation where the intelligence – the software – is extracted from the hardware and put out in the open for a third party to pitch in.
The app paradigm is that software is being extracted from the hardware and pushed into an ecosystem where developers can make it better and users can easily purchase it.
This is not the first time a shift like this has happened, but this is the first time it has happened at this large a scale.
Blue in the face
The first time it actually happened was when a little known company called “Micro-Soft” figured out it would be possible to separate the operating system from the hardware. IBM, by far the dominant player at the time, did not care much about software, and the rest is history.
There are other illustrations of the same paradigm shifts in technology.
For instance, Oracle figured it would be great to make data management independent of the underlying hardware and run data cross-hardware.
From mainframe to mini-computers, then from desktop to laptop, we have witnessed software further dissociated form the hardware.
In the process, users gained additional freedom in the form of easier distribution and lower costs.
The further dissociated the software becomes, the better for the users.
The PC became incredibly successful because of the millions of developers writing apps for it.
But in the app model it is not one company controlling the development of one app such as Microsoft with the operating system or Oracle with the database. It is an open ecosystem of hundreds of thousands of developers bringing unparalleled levels of creativity and power.
As software becomes further dissociated from the hardware, the less expensive it becomes.
When mainframes ran the world of computing, software was intertwined with hardware and cost millions of dollars.
During the mini computer era, companies such as Oracle brought down the price to hundreds of thousands of dollars. Then Microsoft and the personal computer brought prices down to a couple hundred of dollars.
Today, apps are free or often in the 99-cent price range. That reduction in cost is sustained by a huge growth in volume.
Microsoft software cost reduction came from the vision of “a PC on every desk.” The mobile cost reduction comes from “a device in every pocket.”
The paradigm shift extends volume way beyond mobile devices.
This paradigm shift is deep and meaningful and relies on three key changes:
1. Openness of the environment where the software running the hardware is accessible to a large community.
2. Ease of deployment via a marketplace where the output of that community – all the apps – are available on a store where natural selection will apply and great apps will emerge.
3. A price reduction making these apps affordable for most.
THAT SHIFT with some flavor of these three main elements will be applied to most hardware we know today, and the new app ecosystem is making new devices of all sorts much better and much more powerful than any single company could ever do.
The app economy might have been initiated on a phone, but as it evolves it becomes apparent that it impacts every single industry producing any hardware running some sort of software.
With that in mind, at the end of the day, apps have nothing to do with phones.
Ludo Collin is CEO of EachScape, New York. Reach him at ludo@eachscape.com.
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