Challenges and Countermeasures Regarding the Operation of Apple App Store

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1 Challenges and Countermeasures Regarding the Operation of Apple App Store Su-chen Huang1 Tai-chang Hsia2* Li-ching Pan3 1 Department of Finance, Overseas Chinese University 2* Department of Industrial Engineering and Service Management, Chienkuo Technology University 3 Business Administration, HungKaung University, Taichung, Taiwan *Corresponding author, tchsia@ctu.edu.tw Abstract Apple Inc. pioneered in App stores to set the stage for myriad business opportunities, as evidenced by firms who follow our lead. We use Porter five forces analyses to evaluate challenges facing Apple Application Stores. Finding the advantages of Apple application platform mainly came from many loyal customers. Faced with such application of platform use, other companies use open operating systems and launch diverse styles of devices to compete with Apple s closed operation system and fewer styles. Study suggests Apple should increase friendness interface, raise proportion of free applications, launch cheap mobile devices, and offer consumers more choices. Keywords: App Store, mobile device, industry business model, five-force model 1. Introduction Under advancement of technology, daily article have become diverse and user friendly, leading to rapid replacement of consumer electronic products. Apple Computer innovated a mobile application platform known as Apple App Store, which has created vast opportunities and led other brands to follow suit by launching similar mobile application platforms: e.g., Nokia s Ovi Market, 1 Google s Google Play App Store, BlackBerry s BlackBerry World, and Microsoft s Windows Phone Store. Besides the leading mobile application platform, Apple Computer made more amazing achievement in the application online store development and sales. According to the report released by Gartner international research firm in September 2013 [3], total downloading of applications on various platforms in 2012 amounted to 63.9 billion times in 2012, almost doubling to 102 billion in Total downloading in 2014 is expected to reach billion times. Among all these application online stores, Apple App Store leads in downloading. By gleaning data from newspapers, magazines, academic reports and/or other secondary data, this study applied industry analysis 1 Nokia Corporation announced in January 2014 that Ovi Market stopped releasing new applications. 1

2 proposed by Porter (1985) to analyze and explore challenges and countermeasures regarding the operation of Apple App Stores. Literature Review Porter s Competitive Strategy (1980) and Competitive Strength (1985), proposed an industry analysis model based on the unique concept of five strengths [7, 8], integrating the perspectives of industrial economy and enterprise management to measure competitiveness of enterprises by comprehensive means. He argued that market forces are on an individual versus overall economic level: 1. potential entrant s threat, 2. degree of competition between existing competitors, 3. threat of substitute products or substitute services, 4. bargaining power of consumers and 5. bargaining power of suppliers. Development of enterprises must show innovation, the key to opening up a new situation. To match demands of innovation, many firms use Facebook to establish fan pages online and invite professional fans to manage web pages, so that enterprises better understand patrons ideas, improve commodity sales or use search engines integrated with websites to provide multiple services to create value for enterprises. Apple Computer pioneered in 2007 by providing developers with the service of free downloading of iphone application development kit. Its innovative business model created a good reputation for itself and is generally recognized by other brands. Karla and Bröker (2011) argued that application executed on the mobile application platform is the sum of a series of value creations and also the direction of future market development [6]. Bergvall-Kåreborna and Howcroft (2013) suggested that Apple Computer avoids cost and responsibility of managing high-tech workers by crowd sourcing to make it a global application development base [2]. Montgomerie and Roscoe (2013) indicated that Apple Computer has been promoting its ecosystem and thus has a large number of consumers [5]. Bergvall-Kåreborna (2013) compared advantages and disadvantages of Apple App Store and Google s Android mobile application platform, finding Apple App Store a high-end brand marketed earlier than Google Play App Store; its success laid a good foundation for development of Apple App Store [1]. Jauhari (2012) conducted qualitative analysis of Apple App Store and summarized reasons for success of Apple Computer as the focus on consumer experience and blending of the experience in product design. The same brand mobile devices (ipad, iphone, ipod touch) connected by Cloud serial connection have convenience [10]. Drew (2013) argued that strict monitoring of Apple App Store prevents negative news about the platform and establishes a good quality reputation. This is the major reason for Apple App Store s leading position of [4]. All these scholars conducted comparative study of differences between Apple App Store and its chief rival, Google s Android mobile application platform, and proposed excellence of Apple App Store. Yet no one has cited the reasons for strengths of the platform of Apple Computer, the challenges and countermeasures. This study tried to identify the direction of its future development by Porter five forces model. 2

3 Apple App Store Industry Analysis The so-called mobile application platform allows consumers to use mobile devices to download various applications via network. Some of these applications are free and some of them are not free. The current mobile application platforms on the market include Apple App Store, Ovi Market, Google Play App Store, BlackBerry World and Windows Phone Store, all of which expect to make rich profits by using different business strategies. 1) Apple App Store Business Model Apple was founded in California in In 2007, it released the first-generation iphone and provided free downloading of the application development kit to facilitate development of applications by software vendors. In July 2008, 552 applications were available on Apple App Store in 62 countries. By June 2013, applications of Apple App Store amounted to more than 900,000; downloading reached more than 50 billion times. 2 The business model divides into four modules: Apple Inc., mobile application platform, software vendors and consumers, and relevant business procedures, as shown in Figure 1. Apple provides development tool kits to software vendors who develop applications. If deemed by Apple Inc. as qualified, these are sold in Apple App Stores, price determined by the software vendor through the mobile application platform and revenue split at a 7:3 ratio i.e., software vendor gets 70%, Apple Inc. 30%. Contents include education, amusement, game and community. Consumers can pay by credit care as long as registered with Apple App Store. Apple has a feedback mechanism via Internet and provides consumer data to software vendors for reference. This study collected and compared data on users of major mobile application platforms in terms of overall downloading proportion, profitability, total number of applications, mobile device brands, and profit-sharing proportion (Table 1). As shown, downloads of Google Play App Store are most numerous and Apple App Store most profitable; total number of applications in Apple App Store is equivalent to that of Google, but from a market share and profitability perspective, Apple ranks first. Though downloads of Google Play App Store rank first, its profitability is far below that of Apple. To compete with Apple App Store, Google is bound to provide more free applications and support more brands of mobile devices; Apple App Store s response is the next subject for discussion. 2 Please refer to website 3

4 1. P r o v i d i n g d e v e l o p m e n t t o o l k i t The 2014 International Conference on Systematic Innovation 4. L a u n c h p r o d u c t a f t e r r i g o r o u s r e v i e w A p p l e I n c. A p p S t o r e 2. P a y f e e s 3. D e v e l o p a p p l i c a t i o n s 9. C o n s u m e r d a t a f e e d b a c k 6. P r o d u c t m a r k e t i n g 5. P r i c e d e t e r m i n e d b y v e n d o r 7. R e g i s t r a t i o n 8. P u r c h a s e b y c r e d i t c a r d S o f e w a r e v e n d o r s C o n s u m e r s Figure 1. Apple App Store 4 modules: Apple Inc., mobile application platform, software vendors and consumers Table 1. Use of consumers of major mobile application platforms in 2013 App Store Application overall downloading proportion Profitability Total number of applications Mobile device brands Profit-sharing proportion Apple App Store 33% 65% More than 800,000 ipod touch, iphone, ipad Apple 30%, the software vendor 70% Google Play App Store 58% 27% More than 800,000 Samsung, LG, HTC, Sony, Ericsson, ASUS Google 30%, software vendor 70% Windows Phone Store 4% 8% About 145,000 htc HD2, Nokia Lumia, HTC Windows Phone 8X Microsoft Corporation 20%, software vendor 80% BlackBerry World 3% More than 120,000 Battery series smart phone RIM 30%, software vendor 70% Note: Summary according to Global mobile statistics 2013 Section E: Mobile apps, app stores, pricing and failure rates, Website: latest-mobile- 4

5 stats/e#toomanyappstores 2) Apple App Store Industry Analysis by Using Porter Five Forces Model To understand major brands challenges to Apple App Store, this study used a Porter model in analyzing competitive forces: potential entrant s threat, degree of competition among existing competitors, threat of substitute products or services, bargaining power of consumers and/or suppliers to measure competitiveness of Apple Computer. (1) Potential entrant s threat: pressure of new vendors on existing vendors, regarding threat of potential entrants to Apple App Store. Porter (1980) discussed this in 10 dimensions: economies of scale, product differentiation, capital requirements, distribution channels, exclusive product technology, favorable location, government subsidies, learning curve, transfer cost, and government policies. This study found only five of these dimensions (economies of scale, product differentiation, distribution channels, exclusive product technology and learning curve) impacting Apple App Store and therefore discussed the potential entrant s threat in these dimensions, as shown in Table 2. 5

6 Table 2. Assessment of Apple App Store competitiveness by potential entrant s threat According to results shown in Table 2, Apple App Store has palpable competitiveness in these five dimensions, rendering potential entrant s threat insignificant. It is recommended that Apple Inc. keep the existing competition strategy with existing competitiveness. (2) Degree of competition between existing competitors: threat of industrial competitors to each other. To understand competition of the existing competitors and Apple App Store, Porter (1980) discussed degree of competition among such competitors in 10 dimensions: numerous or balanced number of competitors, slow industrial growth, fixed or high warehousing cost, lack of differentiation or transfer cost, considerable growth in production, diverse competitors, high strategic risk, professional asset, fixed pullout cost, mutual strategic relationship. This study found that the system open degree, competitor marketing and professional asset can affect Apple App Store and therefore discussed the degree of competition between existing competitors with Apple App Store in three dimensions, as shown in Table 3. 6

7 Table 3. Competitiveness of Apple App Store by degree of competition between existing competitors According to results shown in Table 3, the system open degree of Apple App Store is the lowest as compared with existing competitors in these three dimensions. Therefore, our suggestion regarding system open degree is that Apple regularly launch new marketing methods in response to openness strength of Android operating system. Regarding security as a major factor to keep closeness of ios operating system and mobile device, Apple should quickly launch more mobile devices and increase software friendliness and convenience. (3) Bargaining power of consumers: the negotiating and bargaining power of consumers. To understand consumers bargaining power, Porter (1980) discussed it in eight dimensions: large purchase concentration of sales volume on buyer groups, considerable proportion of purchase cost or volume of consumers in the industry, standard products, extremely low transfer cost, low profitability, consumer backward integration, no impact on consumer product or service, ample consumer information. This study found that only transfer cost, the large purchase concentration of sales volume on buyer groups and easiness of getting information affect Apple App Store and hence discussed bargaining power of consumers in three dimensions, as depicted in Table 4. 7

8 Table 4. Competitiveness of Apple App Store by the bargaining power of consumers A s indicated in Table 4, given high transfer cost and low concentrated purchasing power, the price of can be high. Yet as functions and prices of existing mobile devices on the market are easily available to consumers, they may find prices of similar devices like Sony Xperia, Samsung Note, Samsung Galaxy sx, and HTC One series lower. This study suggests that Apple launch low-priced mobile devices for greater market share and higher percentage of free applications on the platform. (4) Threat of substitute products and substitute services: the threat from other industries or services. Regarding this threat to Apple App Store, Porter (1980) discussed it in four dimensions: consumer preference to substitute products, price-utility ratios of substitute products, consumers transfer cost, and consumer perceived differences about brands. This study found all these dimensions affecting Apple App Store and therefore analyzed with specific explanations, as detailed in Table 5. 8

9 Table 5. Competitiveness of Apple App Store by substitute products and substitute services According to Table 5, regarding threat of substitute products and substitute services to Apple App Store, in the dimensions of relative price-utility ratio of substitute products and consumer transfer cost, as Apple App Store only provides applications for mobile devices produced by Apple, Android operating system adapts to different brands, lending consumers diversity in choice. Therefore, in addition to launching low-priced mobile devices, this study suggests that Apple should supply more varieties to allow consumers more diverse choices and increase percentage of free applications to enhance the competitive strength. (5) Bargaining power of suppliers: negotiating or bargaining power of upstream suppliers. As for this threat, Porter (1980) discussed it in five dimensions: dominance and relative concentration of buyers, no need to compete with substitute products of the same industry, industry and major consumers, whether supplier product is a major input of the buyer, driving force of supplier 9

10 integration. This study found no need to compete with substitute products of the same industry and supplier backward integration capabilities affecting Apple App Store; bargaining power of suppliers was discussed in these two dimensions, as detailed in Table 6: Table 6. Assessment of competitiveness of Apple App Store by the bargaining power of suppliers According to Table 6, regarding the bargaining power of suppliers, in the dimension of technology provided by the software vendor, as threshold of software vendors is relatively low, software vendors compete with each other on the platform, so that Apple has absolute dominating power. In the aspect of driving force for integration of suppliers, though Apple allows software vendors to deal with consumers directly without charge, price to Apple should be lower or equal to the price on websites of software vendors. Therefore, it can reduce intention of purchasing on websites of software vendors. As a result, driving force for software vendors to integrate will be weakened. Based on the above analysis, it can be learnt that Apple has absolute power in negotiation with suppliers, yet to provide a better service platform and face increasingly fierce competition from competitors, we suggest that Apple adopt flexile profit sharing with software vendors of different sizes and levels to enhance the intention of software vendors to sell in Apple App Store. 4. Conclusion Consumer electronics products evolve quickly. Apple App Store has created mammoth opportunities for themselves and caused other brands to follow. Aside from the lead position of mobile application platforms, Apple Computer garnered more amazing achievements in application online store development and sales volume. According to the five-force model of Porter, toward development strategy, in regard to potential 10

11 entrants threat, maintenance strategy should be adopted; as for existing competitors, Apple Computer should consistently renew marketing tactics and vary mobile devices, augmenting software interface friendliness and convenience; in the aspect of consumer bargaining power and threat of substitute products and substitute services, Apple Computer must launch low price mobile devices and raise percentage of free applications; as for bargaining power of suppliers, Apple must diversify profit-sharing ratios among software vendors. This study provides countermeasures for Apple App Store in the face of its challenges. References [1] Birgitta Bergvall-Kåreborn, Mobile Applications Development on Apple and Google Platforms, Communications of the association for information system, Volume 29, Article 30, pp , December [2] Birgitta Bergvall-Kåreborna and Debra Howcroft, The Apple business model: Crowdsourcing mobile applications, Accounting Forum, Volume 37, Issue 4, pp , December [3] Gartner. (September 19, 2013) Gartner Says Mobile App Stores Will See Annual Downloads Reach 102 Billion in 2013, Retrieved April 10, 2014, from [4] Jeff Drew, How to Develop and Publish a Mobile App, Journal of Accountancy, Volumn 215, No. 2, pp.24-31, February [5] Johnna Montgomerie and Samuel Roscoe, Owning the consumer Getting to the core of the Apple business mode, Accounting Forum, Volume 37, Issue 4, pp , December [6] Jürgen Karla and Henry Bröker, Mergence Of The App-Economy: What Drives The Mobile Business Industry In Germany? International Journal Of Business Research, Volume 11, Number 5, pp , [7] Porter, M.E., Competitive Strategy, New York, NY: Free Press, [8] Porter M.E., Competitive Advantage, New York: Free Press, 1985 [9] MIT Technology Review. (2009, December 21) Apple Inc. Retrieved April 10, 2014, from [10] Vinnie Jauhari, Innovation through Emergence of Technology Communities: Some Management Lessons, Journal of Technology Management for Growing Economies, Volume 3, No. 2, pp , [11] Apple Store(iOS). Retrieved April 10, 2014, from Store_(iOS). 11

12 Topical area (Select from listed topics on Call For Papers): Corresponding author(s): Name: Hsia, Tai-Chang Position: Professor Affiliation: Chienkuo Technology University Postal Address: No.1 Chieh-Shou North Rd., Changhua City, 500 Taiwan, R.O.C. Phone: Fax: First Author/Correspondence: Professor Huang, Su-Chen / tb033215@gmail.com Third Author/Correspondence: Professor Li-ching Pan / hklcpan@gmail.com 12

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