The dark side of Apple’s dominance

It’s a nightmare scenario for carriers, retailers, device makers, and much of the mobile industry: Apple is sucking up all the money, leaving crumbs for the rest. That’s the same fear the music business had when Apple introduced the iPod and iTunes. At the time, it forced the industry into a devil’s bargain in which Apple reaped 30 percent of sales and fostered a dependence on its closed platform; otherwise, the music labels were faced with making no money at all due to the rise of file-sharing sites such as Napster. Their best option would have been to create their own platform, but instead they trotted out a series of clunky, mutually incompatible, hard-to-use products and left Apple as the only viable option.

That fear explains why carriers and retailers have aggressively promoted Android, Windows Phone, and other iPhone competitors. Carriers pay smaller subsidies on those devices, which helps keep their profits up. And a market where no one platform dominates gives them some leverage when dealing with Apple.

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But users have voted otherwise, vastly preferring the iPhone, which cost the carriers more money per unit, thus reducing their profits. Android sales plummeted in late 2011, after the iPhone 4S‘s release — chalk another victory for Apple’s superior product and unmatched level customer satisfaction. Businesses are just as gaga over the iPhone as individuals — even archconservative firms such as Halliburton have made the switch. The result has been devastating on retailers’ and carriers’ profits, as Forbes details in its report. Meanwhile, Apple alone — even though iPhones account for just 9 percent of mobile phones sold — reaps about 75 percent of the mobile phone industry’s profits, and that number continues to grow. (Apple’s segment of U.S. sales is much higher, as is its share of smartphone sales.)

Should this economic trend continue, Apple will be the Microsoft of mobile platforms, the SAP of mobile apps, and the Oracle of mobile services. If you’re an Apple fanboy, that’s great news and would suggest a world very much like that of the Macintosh or iPod/iTunes: integrated, fun, innovative, and functional.

What could be bad about that? Nothing, for a while. But monopolies tend to devolve as the focus becomes about maximizing profit of the customers who have nowhere else to go. Any cable or telecom client knows that result firsthand, and it’s a common fate in the technology industry’s history.

A recent report by Deloitte of mobile carriers, device makers, and other industry leaders paints an industry that has lost control over its destiny, as companies such as Apple and Google ascend. Carriers have been unable to get to grips with the fact for more than a decade that their networks are essential to mobile usage, but they’re not where the customer gets its value.

Research in Motion showed that with the BlackBerry, providing a new way to communicate. The carriers didn’t do that; instead they were building proprietary messaging services that worked only among their customers. RIM’s service required a BlackBerry but worked across carriers. Apple showed that with the iPhone, which put flexible computing power in our pockets. Calling them smartphones is an anachronism; they’re pocket computers that can also handle phone calls. Again, carriers weren’t driving any of this; all they’ve done is try to create walled gardens of crappy apps for customers that had no choice. Apple forced open that choice, so it reaped the economic benefits.

That Deloitte study shows this “dumb” pipe phenomenon has not changed at all; carriers still don’t get it. But it shows one change: The carriers themselves now believe they have no hope of driving mobile value or innovation. They see Apple, Google, and other content- and Internet-oriented companies taking that mantle. Welcome to 2007.

But that “dumb pipe” phenomenon extends beyond the carriers. Device makers are in a similar pickle, and that’s why they bet on Android, figuring its free licensing cost and ability to be customized would let them compete both with Apple’s “do it our way or else” approach and each other. Instead, they used Android’s customizable nature to create superficial differentiation, hindering developers and confusing users.

Their refusal to keep their devices updated only made things worse — that’s the “dumb pipe” approach of investing the bare minimum once a customer has been hooked, rather than take the Apple strategy of making the customer want to stay because things keep getting better. You know it’s bad when a platform licensor finds it necessary to create and even sell its own products to show the licensees how to do it right: the Nexus One and Galaxy Nexus smartphones, and an in-development Android 4 “Ice Cream Sandwich” tablet expected later this year, in Google’s case.

Microsoft took those lessons and came up with Window Phone 7, whose license puts severe restrictions on device makers’ freedom to make changes. That’s kept the platform nicely consistent and made updating devices much easier for all concerned. It’s too bad Microsoft’s approach to smartphones focused on just a trendy subset of usage: social networking.

What this all means is that Apple has achieved an environment where it is almost sure to keep gaining. It charges more for its devices but makes carriers eat the increase — a customer pays the same for an iPhone as for an equivalent Android device, which helps encourage iPhone sales, while chipping at carrier profits. By the way, carriers have huge margins on their services, so I’m not shedding a tear over Apple’s impact on their still-large profits, especially given that Apple does the innovation work and they don’t. But I’m more sympatetic to retailers, who operate on small margins.

As more people buy iPhones, app developers and content creators will have to sell more of their wares through iTunes and the App Store, giving Apple a 30 percent cut each time — again a higher percentage than they’d pay other stores but with the undeniable draw of a significant market. It’s the old industry joke: You’ll make it up on volume.

Let’s be honest: Apple’s amazing success is due as much to how well it executes on innovation and customer engagement as it is on how consistently its competition fails on those issues and basic product execution. Apple wouldn’t be as strong as it is now if its competitors weren’t so lame, so I have trouble criticizing Apple for taking advantage of that reality, despite my awareness of its less-than-savory impulses.

Maybe Apple will buck history and not fall into the devolution trap. An encouraging sign is its progressive approach to using environmentally positive manufacturing approaches, as well as its forthright approach to pushing for better labor standards in sweatshop nations such as China, showing it has a conscience and is willing to use its muscle to make things better — within the bounds of profit-making capitalism and users’ willingness to pay. Apple use the same exploitative Chinese labor as everyone else, but last I checked it was the only one to reveal those suppliers publicly so that activists could see if it was trying to improve workers’ conditions.

And Apple’s history of continual innovation is strong — at the level of an IBM, an established innovator. When Apple traded innovation for short-term exploitation in the 1990s, it nearly died, creating a powerful object lesson at Apple that has not gone away. There’s hope that Apple will continue to act that way even if it becomes the unmatched powerhouse of mobile technology and content distribution.

That’s a hope, not a certainty. Today, the situation is that Apple wins. Users win (at least for now). And everyone else loses. Even though that’s mainly their own fault, it’s an uncomfortable direction.

This article, “The dark side of Apple’s dominance,” was originally published at InfoWorld.com. Read more of Galen Gruman’s Mobile Edge blog and follow the latest developments in mobile technology at InfoWorld.com. Follow Galen’s mobile musings on Twitter at MobileGalen. For the latest business technology news, follow InfoWorld.com on Twitter.