Apple's new iAd proposition has been generating a great deal of discussion lately, most of it positive, and most of it remarkably short-sighted. It seems most people, including Steve Jobs, have forgotten the basic lessons of computing and the internet. People who forget history are doomed to repeat it. The iAd has no future, and neither does the iPhone/iPad. I will show why iAds must inevitably die, and how Steve Job's strategy for iPhone and iPad will inevitably lead Apple into becoming at best a marginal niche player, at worst an ex-business.
Layered model
We need to start by remembering what the smartphone platform is. First, let's forget the archaic concept of a "mobile phone." The iPhone is no more of a phone than a PC running Skype. The majority of iPhone time, money, and resources lies in apps. iPhones, just like smartphones running Google's Android or Microsoft's WinOS, are not phones but small computers that happen to have telephone capabilities. They may have started as phones, but they outgrew that classification a couple of years back. The only serious difference between a smartphone and a computer is size and the fact that smartphones are inherently location-aware. You will notice that the creators of smartphone operating systems are all computer companies.
As computers, smartphones are subject to the multi-layered business model common to all computers. Technology manufacturers, such as Nokia and Samsung, build the physical hardware. Above them we have the providers of operating systems, of whom the major players are Apple, Google, and Microsoft. Other companies provide apps and services. Some services are delivered directly through the operating system, such as SMS and phone calls, while others are delivered within applications themselves. Under this model, advertising falls into the category of services, while widgets combine apps with services.
Understanding the dynamics of this marketplace requires recognizing where the power lies, and how it shifts as technology evolves.
The smartphone marketplace
Hardware manufacturers make their money by selling new phones. They have no interest in making phones that last forever, or that can be upgraded via software. Just like PC manufacturers, their only chance of continuous revenue is by continually developing new models. The best way to sell a new model is to provide new capabilities, but opportunities for new capabilities are limited if the operating system does not provide access to them. Since operating systems are more difficult to develop than applications and services, and cannot upgrade as quickly, the emphasis on exploiting new capabilities inevitably falls on the app developer and service provider community. Thus the success of smartphone hardware providers is inextricably linked with the development of an active mobile app marketplace and a dynamic service provider community.
Irrespective of the capabilities of the hardware, both apps and services are limited by the capabilities of the operating system. If the operating system does not permit access to a new hardware capability, then that capability cannot be exploited. If the operating system does not provide an efficient development environment, then it may be difficult to exploit the new capability in a cost-effective manner. Thus hardware manufacturers, application developers, and service providers are all dependent on the operating system.
Operating system vendors can make money from both sides of the equation. They can license the operating system to the hardware manufacturer, and they can charge licensing for apps built on their platform, or for developer kits and support.
Operating systems are only attractive to hardware manufacturers to the degree that they offer future-proof access to new capabilities the manufacturer may one day create, and to the degree that the operating system is attractive to application developers and service providers.
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