Apple Reinvents Software Distribution

| About: Apple Inc. (AAPL)

By Carl Howe

To the tune of 'American Pie':

Buy, buy, Mister Macintosh guy,
Get your software on your Mac with just a one-button buy.
I see Bill Gates by himself drinking whiskey and rye, and saying
“Digital downloads won’t ever fly”
“Digital downloads won’t ever fly.”

My doggerel lyrics to Don McLean’s classic song may be funny, but my meaning is serious: Apple’s (NASDAQ:AAPL) announcement of the Mac App Store on Wednesday just sounded the death knell for the traditional business of shipping software on CDs and DVDs. The only question is how long it will take for the corpse will fall over.

What’s the big deal? It’s simple: Apple’s taking the store model that launched 5 billion iPhone downloads and moving it to its installed base of 50 million Mac users. That’s poised to fundamentally change the software market because:

  • Consumers will flock to one-click software buys. PC buyers today live with software installs that include as many as 25 separate steps. Once consumers discover that they can buy and install a Mac app with a single click at the App Store, they’ll never accept fussing with CDs, install wizards, and license keys again.
  • Developers will kill for the lower distribution costs for digital downloads. When all they have to do is to submit binaries to Apple, software developers won’t have to spend four to eight weeks designing, mastering, and distributing physical media and its associated packaging. Add in the recognition that developers no longer have to manage software package inventory and take back old versions, and developers will ditch CDs in a heartbeat.
  • Software companies will stampede to anything that makes money for them faster. A software business selling CDs often has to wait 60 days or more from the time it ships product to a distributor to when the software company receives revenue from that product. Even with Apple’s strict review process, shrinking those two months to a matter of days will accelerate the sales velocity for software companies, making them more valuable in investors’ eyes.

So Apple’s Mac App Store will please consumers and software developers, but why should that disrupt the overall software industry? I think this seemingly small change will be seismic for three reasons:

  1. Apple will get even richer. For the first time, a hardware vendor is going to reap a 30 percent cut of software sales on its platform. Suddenly, controlling a closed app distribution system—traditionally thought to be a competitive disadvantages over more open markets—is going to generate billions for a hardware maker, just the way that the iTunes store cracked open the digital music download market. Expect every margin-starved hardware maker to look for a way to adopt Apple’s App Store model.
  2. The App Store will unify software licensing. Because Apple can exercise complete control over the software sold through its store, the App Store will make today’s diversity of shrink-wrap software licenses extinct. Within two years, the likely billions of downloads sold to Mac users will be sold under one set of license terms: Apple’s. And that trend is unlikely to stay within Apple’s ecosystem; once software vendors adopt Apple’s license, few will bother to create entirely different ones for PC versions.

The bottom line: Apple has a lot of power over its ecosystem today, but the Mac App Store will give Apple more power over software than it has ever had before, allowing it to set revenue splits, terms, and updates. And because no other platform has nearly Apple’s control over its ecosystem today, this change will give Apple an advantage over competitors who have no such stores.

Buy, buy, Mister Macintosh guy…..

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