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3/14/2011
05:50 PM
Dave Methvin
Dave Methvin
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Microsoft Needs Mobile Money

It's not enough for mobile to be hot; eventually Microsoft has to find a way to make it profitable too.

There are a lot of ways to make money off the shift to mobile computing. Some companies have found several ways to profit from mobile, but Microsoft in particular seems to be in a tough spot due to its late start in mobile, a very small market share, lack of leverage with the all-powerful carriers, and a revenue model based on licensing the operating system.

When it comes to making money off mobile computing, the expert is Apple. How do they profit? Let us count the ways. First, they sell iPhones and iPads directly from their stores. Second, they sell accessories for those devices in their stores. Third, they get a kickback for devices the carriers sell at their stores. Fourth, they take a cut of every app purchased through the App Store. Fifth, they take a cut of any in-app sale or subscription. Sixth, they run the iAd network for displaying in-app advertisements and receive revenue from advertisers. Whew. Did I miss any?

It's not just a case of having many channels to make money, but also a question of how much money you can squeeze out of each one. Apple's yearly release cadence for the iPhone is an example of how the company maximizes profits. There is an artificial scarcity created by Apple's insistence on just one current model of the phone. You want a physical keyboard? Too bad. But you can be sure that there will be a new model out every summer with a few nice new touches, and it will be improved enough to make you want to trade in your previous iPhone.

Accessories are another opportunity for astronomical profit margins. If you buy a low-end iPad 2 (Wi-Fi only and 16 GB of memory) it will "only" cost you $500. Yet you don't want to risk scratching or breaking the glass on that baby, so of course you'll want some sort of cover. Apple answered with the Smart Cover, a $40 assemblage of magnets and plastic (sorry, polyurethane) that covers the screen. If plastic is not chic enough for your iPad, an Italian leather version is available for $70. There's no standard video output port, so you will have to lay out $40 for an HDMI dongle if you want to show video on a TV screen. Need a cable to show your iPod video on a VGA display? No problem if you have another $40 for yet another dongle.

Give Apple their props, they basically reinvented the smartphone category when they released the original iPhone in 2007. Because of that, AT&T was willing to pay Apple a pretty decent kickback for exclusivity in the U.S. market. Although that exclusivity has expired now that Verizon has the iPhone as well, it no doubt piled some serious dollars onto Apple's bottom line during those years. Regardless, Apple still gets its share of revenue from every iPhone or iPad that either AT&T or Verizon sell.

So let's turn our attention to the software and services side. The only way a non-rooted phone can get apps is to use the App Store, controlled by Apple. The company uses a heavy hand to control what appears in the App Store. The Internet is full of sad stories from developers who have had their apps rejected by Apple for reasons that were vague, arbitrary, or non-existent. Yet that is just one more way that Apple controls their iPhone and iPad ecosystem, creating a walled garden that has served their business pretty well to this point.

Apple's monopoly on the iPhone and iPad ecosystem has raised plenty of controversy, but up to this point the user-opposition has offered a lot more words than action. Things have turned ugly in the past month with Apple's insistence that they get a 30% cut of any subscription revenue generated by apps. Yet it's not clear that app and content developers can vote with their feet as long as users are enamored with Apple's products, even if the "Apple tax" is incredibly high.

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