How Apple’s business model just became even more beautiful

Last week we saw another one of Apples wonderfully crafted presentations. What a choreography! But besides learning how to present really well (just observe how a lot of information is conveyed in a way that makes it all look so simple and clear), there was something special going on.

First of all, what was it all about? New iPhone models, Apple goes payment services (aka Apple Pay), and the new Apple Watch. Now, at least to me, it seems that the watch is dominating the press coverage. But let’s think about what may be going on in the background for the moment.

The iPhone needed an upgrade anyways. Bigger screens (the competitors had this already, and customers were asking for it), better camera, faster processor, and new technology that allows one to use the phone for super convenient payments. Good move.

Then Apple Pay. How smart is that? Apple positions itself in-between the merchants and the customer and every time somebody wants to make a payment Apple sends a request to the credit card company and the credit card company then sends the money directly to the merchant. Apple is not involved in the actual transaction, has less trouble, and cashes in anyways. Customers benefit, and merchants will want to offer the service. Good move, with lots of potential.

Finally, the Apple Watch. When you read the coverage, then you realize that the watch is actually not yet ready. Battery life is still an issue, and so is the interface. And maybe the design will still change. But there are four truly innovative features almost hiding in the background. First, it’s a fashion item, unlike all the other technical devices that are already on the market. Second, it has more technology packed into it, and third, it’ll have apps on it. Fourth, you can use it to pay, with Apple Pay.

So, what’s so special about this event? It’s all about network effects. I’ve worked on two-sided markets for a while, and there are three types of network effects that play a role. The first ones are direct network effects. These are the ones we know from Facebook: the more people are on Facebook, the more I like to be on Facebook. These ones play less of a role. The second ones are indirect network effects. They arise because app developers find it the more worthwhile to start developing apps the more users will potentially download them. This is why Apple presented the Apple Watch now. Starting from now, until the product will finally be sold, they can develop apps, which will in turn make the watch more attractive to consumers, so it will have positive effects on demand. But developers will already see that now and will therefore produce even more apps. Very smart, and all Apple has to do is to provide the platform, the app store, and cash in every single time somebody buys an app. Finally, Apple Pay. Similar model. The more people use Apple Pay the more merchants will use it, and this will make people buy more Apple devices so that they can use the services, and so on.

So, if you ask me, taken together this is a huge step for Apple. Not because the Apple Watch or the iPhone are particularly great, but because Apple’s business model is incredibly smart. Beautifully smart. And I haven’t even mentioned that sometime soon all the Apple mobile devices will be much better integrated with the operating system on their laptops and desktops. As they said in their own words, something “only Apple can do”.

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About kleintob

Tobias Klein is an Associate Professor at Tilburg University. He is an economist by training and obtained his Ph.D. from the University of Mannheim, Germany. Before that he visited the University of California at Berkeley Ph.D. program and the Ph.D. program at University College London, respectively for a year. He is passionate about economics, politics, food, and travelling. See http://www.tobiasklein.ws for his professional website.

One response to “How Apple’s business model just became even more beautiful”

  1. Jeff Campbell says :

    Your next post should cover competition from the open source (Android) community. RFID is so ubiquitous now, it is only a matter of time before some otherwise bored college kid will create a bitcoin-based payment system.

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