Should Apple Spin Off Its App Store?

The rise of Apple's (AAPL) App Store has been nothing short of phenomenal. Steve Jobs himself has admitted to his astonishment over its amazing success. It is the envy of every network carrier and cell phone maker alike, and for good reason—what Apple holds in its hands is not just some nifty store driving sales of its hardware; rather, it’s the fruit of future computing. As discussed in “What are Apple’s 45 million users worth?” imagine the value of billions of users on this platform.

By spinning off its App Store and iphone operating system, Apple will still be able to focus on engineering the best and brightest products to connect to the web. Already companies are waiting for Apple according to an undisclosed analyst to deliver its tablet before engineering their own product. And the smart phones themselves are looking more and more like Apple copycats. Networks and companies which produce smart phones are flocking to recreate what Apple already has, that is an App Store of their own to compete with the growing demand of the iPhone. Spinning off its App Store and iPhone OS 3.0 , Apple will allow for its tens of thousands of developers an open distribution platform for hundreds of millions of consumers.

Think of all of the devices companies have yet to dream up that could use the apps already in place. Right now Apple has the opportunity to do what Microsoft (MSFT) did for PCs in the 70’s; however, this market is already in place, already rapidly expanding and will conceivably replace all cell phones as we know them today in a short amount of time. In fact, it’s so much larger than smart phones, because I don’t believe the human imagination has yet grasped all of the possible devices that would work well with the App Store.

Recently, a report by Piper Jaffray considered how many units an Apple tablet would sell. The conversation, however, should shift to not how many tablets are sold, but how many devices are connected to Apple’s platform. How many users are on the platform and how much does Apple stand to earn from each user? The App Store and Apple operating system combined would be a massive platform to connect the world’s computing devices.

The recent events between Apple and Google (GOOG) show the extraordinary differences between how the two companies are vying for the world’s neural network: see “It’s Not a ‘Cloud’, It’s a Brain”. What’s at stake is control over the communication platform of the modern world—through video games, video conferencing, real time map syncing, communications as we know, communication as we have yet to know, hyper specific applications, social networking… I can go on and on regarding the possibilities and what this platform means. Why close something off that can be so much more profitable on its own and so much more beneficial to humanity? More developers will flock to it; cell phone companies looking to transition toward smart phones on an already proven platform rather than develop their own; OEMs will create their own devices on the platform and so will electronic device makers in general. Apple will be there to collect its portion of every App transaction. So my plea to Steve Jobs is to open up the App Store, spin it off to the world—because a) the FCC is already questioning your business practices—a trend I believe will increase as the iPhone is more and more successful, and b) openness is cool, it’s in, it makes for good business, and the world will love you even more for it.

Disclosure: Long on Apple

Comments

[FreeRange:]

Ridiculous. Apple doesn't just "engineer" products, they create dynamic ecosystems with amazing products and services hanging off of them and interacting with them. Why in the world would they split that up? Why would they open it up when they make a ton of money, and profits by keeping it closed? What makes Apple great is not engineering single products, but about the whole package. If they "opened it up" every low cost, low margin hack would be competing against them - you know, like in the WinTel PC market. What you are talking about would turn them into a commodity and actually decrease revenue and profits over time.

Aug 10 11:34 AM

[rd4sndk:]

You make a compelling argument. If we are to believe Apple, they don't make much profit off of the app store; so by spinning it off, they could make a lot of money on each down load with none of the cost.

The potential cost to apple would be to leave its app store platform up to less imaginative people who may corrupt the present excellent user experience. Apple needs to make the decision if the long term risk out weigh the short term financial gains.

Aug 10 11:37 AM

[Murphy Mac:]

Yeah, they DO make a lot of money on the app store. People buy iPhones and iPods to get the apps. And Apple makes a big margin on every sale.

Go out on a limb, build a mobile phone when everyone insists you will fail, turn a maturing industry completely upside down, and spin it off immediately so you have no say in it anymore. Yeah, makes a lot of sense.


On Aug 10 11:37 AM rd4sndk wrote:

> You make a compelling argument. If we are to believe Apple, they
> don't make much profit off of the app store; so by spinning it off,
> they could make a lot of money on each down load with none of the
> cost.
>
> The potential cost to apple would be to leave its app store platform
> up to less imaginative people who may corrupt the present excellent
> user experience. Apple needs to make the decision if the long term
> risk out weigh the short term financial gains.

Aug 10 11:49 AM

[Math 101:]

If you open the app store then all those sweet profit margins on the hardware drop off considerably because every Tom, Dick and cheap plastic, no QA cell phone maker will put this awesome OS on a POS cell phone and sell, no give them away. As we've seen with PC's, people will buy cheap sh*t (Windows PC) and be unhappy while they could have spent a little more to buy quality integrated hardware/software (Mac/OSX) and be happy, with more free time to enjoy life instead of fighting viruses, spyware, and malware. Face it, most people just don't get it, and will buy crap because they think they're getting a "deal". It is true, they get a "deal", a bad deal. Bottom line is Apple doesn't need to open anything up to make a profit. All Apple products make a killing in the profit margins. Apple doesn't care if everyone is using their products. They care that those who do are making it possible for Apple to make an extremely huge amount of money and to continue to make the best possible products ann user experience for a reasonable price. Period.

Aug 10 12:00 PM

[Julian Ivan...:]

Oh god, here we go.. parallel this with "Should Apple license OS X" and you've got the same craptapulous arguments to go over all over again....

Why SHOULD Apple spin off the App Store? Its one of the most compelling reasons for buying and sticking with the iPhone and its successors. Its a unique selling point. It makes the iPhone the most compelling device to write software for. It singlehandledly slays all other competitors.

Sure, go write ahead (pun intended).. knock yourself out. Can't wait for the next piece of insightful AAPL analysis.

Aug 10 12:00 PM

[NDinMSP:]

I agree with the above posts. The App Store is a big reason people buy the phone. Why else would they feature it in their very effective "There's An App For That" TV ads.

Aug 10 12:45 PM

[Andrew Oresto:]

True, there is significant value in apple running a closed ship with the iphone--it then holds a user experienice envied by so many customers and likely causes a lot of them to switch to iphones. This is true.

But...

Right now with corporations vying for leadership in 'cloud' technology, Apple has the chance to become platform for the majority of the world's computing devices. This is essentially so much larger than what the company will be if it remains a closed 'cloud'.

In fact, I believe by not opening its iphone operating system and app store, it leaves the doors open for the likes of Google to be successful where Apple already is, but on a much larger scale. The real battle going on is not about how many pieces of hardware a company can sell; it is about who owns and operates the platform that runs all of the myriad of devices connected to it--and these devices will be exploding onto the market at a more and more quickening pace. That is where the future is.

I see an opportunity for Apple's OS and app store to be that platform; because the sum total of all the devices with the ability to connect to it far exceed the value of the actual devices sold.

On Aug 10 12:45 PM NDinMSP wrote:

> I agree with the above posts. The App Store is a big reason people
> buy the phone. Why else would they feature it in their very effective
> "There's An App For That" TV ads.

Aug 10 01:33 PM

[SKR MBA:]

Did you huff paint before writing this article?

Aug 10 02:53 PM

[daniel murray:]

Not just no, but hell no.

Aug 10 05:23 PM

[Murphy Mac:]

Compare Android and iPhone. There is no comparison. Android appeals to tinkerers. A phone OS is targeted to the billions, not the Linux crowd that likes to tinker.

Everything you say about spinning off the App Store leads to it being Android. Well - Android is out there and so far it's not doing much compared to the iPhone.

A phone is far different from a computer in terms of user expectations for the OS. A phone is more like a Tivo in that sense - you just want it to work without babysitting it. Android has a lot in common with Tivo, but start spreading it onto hundreds of hardware devices and you don't know what you'll get.

Stripping the App store from Apple's protective walls would diminish the Apps' ability to just work. And so it's just another draw into the Apple ecosystem.

Aug 10 05:26 PM

[Tom B:]

This line nearly made me fall off my chair:

" Right now Apple has the opportunity to do what Microsoft (MSFT) did for PCs in the 70’s;"


What, exactly, in your estimation, was MSFT's contribution to the PC world, and why ON EARTH would anybody want to replicate that? The pat answer would be MSFT wrote DOS, later Windows (having seen early versions of Mac OS) and then allowed any idiot to throw a bunch of parts in a box and sell it to the rubes. Palm tried exactly the same questionable business model, when they out-licensed their OS to Handspring, etc. Palm's doing great now, aren't they (not!)? This was supposed to promote "competition". All it actually produced was "frustration", and vendors competing over razor thin margins to see who can use the cheapest possible parts and still assemble something that will boot.

One (of several) reasons MSFT is unable to birth an OS more elegant than, say, a Pontiac Aztec, is that they have eight zillion hardware configurations to support with every release. They're a massively huge, successful company, to be sure, but that's only because they found a big stable of "sheeple" that will buy anything they spew out, that is, the Enterprise market.

Aug 10 11:00 PM

[mollytjm:]

Interesting article, but I don't see Apple doing it that way. They do like the control they have and it's their store with their name on it.
I don't want them to be microsoft, that's for sure. The difference is that Apple gives value and support for their products. Microsoft had a monopoly so didn't both to give much in value or support.
Apple's a great company and I'm sure they have a pretty good idea of where technology is headed...they 'get it'. It'll just be interesting to see how they interpret the future and i think the release of the next big item will give us more of a clue.

Aug 11 09:01 AM

[jack dee:]

Windows is the worldwide platform of choice with 95% of the market Apple has less then 4% of the market. And has been and continues to be completely unable to increase its global market share.

THESE ARE FACTS kids not idea , dreams or wishes.


Phones smart or dumb are not about to displace any machines, but they are fun.

media tek, and dozens of other companies will be selling a vast array of smartphones worldwide, perhaps apple has an app for that?

Aug 11 01:51 PM

[Andrew Oresto:]

Thank you for your comments,

I agree with your thoughts on MSFT; in now way would I want Apple to be MSFT. What makes Apple unique is its unceasing ability to innovate. MSFT, rather, replicates rather than innovates. There is a transition happening right now though, and the corporation with the best approach to this shift is likely to grab significant leverage over the platform of device connected computing. Rather than implement a business model as MSFT has done--a seller of software, here the value lies in the "users" connecting to the platform. Here Apple will just give the iphone OS 3 away and charge collect revenue through its app store. As a platform, the market itself will ensure only the best quality devices and apps will succeed, and Apple will be the primary "cloud" to run it all.


On Aug 10 11:00 PM Tom B wrote:

> This line nearly made me fall off my chair:
>
> " Right now Apple has the opportunity to do what Microsoft (seekingalpha.com/symbo...)
> did for PCs in the 70’s;"
>
>
> What, exactly, in your estimation, was MSFT's contribution to the
> PC world, and why ON EARTH would anybody want to replicate that?
> The pat answer would be MSFT wrote DOS, later Windows (having seen
> early versions of Mac OS) and then allowed any idiot to throw a bunch
> of parts in a box and sell it to the rubes. Palm tried exactly the
> same questionable business model, when they out-licensed their OS
> to Handspring, etc. Palm's doing great now, aren't they (not!)?
> This was supposed to promote "competition". All it actually produced
> was "frustration", and vendors competing over razor thin margins
> to see who can use the cheapest possible parts and still assemble
> something that will boot.
>
> One (of several) reasons MSFT is unable to birth an OS more elegant
> than, say, a Pontiac Aztec, is that they have eight zillion hardware
> configurations to support with every release. They're a massively
> huge, successful company, to be sure, but that's only because they
> found a big stable of "sheeple" that will buy anything they spew
> out, that is, the Enterprise market.

Aug 13 10:35 AM

[reverie:]

From a customer perspective I hope and expect that something like Microsoft's OS monopoly on PCs will never ever return. I would like to see as many of the 7 current smartphone platforms (Android, Limo, Symbian, WinMo on one side and RIM, Apple, Palm on the other side) to succeed as possible. What's the use of one dominant platform? The common baseline standard for cross-compatibility will be HTML5, but beyond that I would like to see relentless competition in native apps and OS features to bring ever more innovation and lower prices to the market.

Aug 13 05:46 PM