Speaker 1: Thank you, thank you. You've got to picture it. This
Speaker 1: massive stage. Apple CEO Tim Cook up there in front
Speaker 1: of five thousand people, an audience full of software developers.
Speaker 1: You are a part of everything that we do and
Speaker 1: everything that we will do going forward. It's called the
Speaker 1: Worldwide Developers Conference or w w d C. Software Engineers
Speaker 1: from all over the world come to the San Francisco
Speaker 1: Bay area to find out what Apple has in store
Speaker 1: for them over the coming year. At last year's conference,
Speaker 1: Christmas came early. The iPhone makeup promised to double the
Speaker 1: cash you could learn if you made an app, put
Speaker 1: it on the App Store and convince customers to subscribe
Speaker 1: for a whole year. That's like a huge, huge, dramatic move.
Speaker 1: It increases the revenue by by twenty something percent. Uvalkamenka
Speaker 1: was listening in the audience. He had traveled from Israel
Speaker 1: to be that it is a game changer of showing
Speaker 1: what the strategic shift is UM that Apple is going through,
Speaker 1: because it's not like it's not something that they would
Speaker 1: do UM without you know, a very good cause. You've
Speaker 1: always right, Apple probably wouldn't do this unless it needed to.
Speaker 1: After all, it's the world's most highly valued company, the
Speaker 1: creator of the Mac, the iPod. It literally changed the
Speaker 1: world with the iPhone. But last year Apple's revenues dropped
Speaker 1: for the first time in fifteen years. Investors started to
Speaker 1: worry that everyone who wanted a small phone and already
Speaker 1: had one. Now Apple had to prove it was more
Speaker 1: than just the iPhone company. All of a sudden, the
Speaker 1: app store was at the heart of the new growth strategy.
Speaker 1: I even had a sense that all the people around
Speaker 1: me that were most of them were engineers coming from
Speaker 1: from um all the different developer companies. I had a
Speaker 1: sense of not even grasping the extent of of the change.
Speaker 1: The change might seem small from the outside, but in
Speaker 1: fact it was the first move from Apple in a
Speaker 1: bigger effort to sweeten its relationship with some thirty million
Speaker 1: software developers. You see, Apple needs them. They make most
Speaker 1: of the apps that people use on their phones. Well,
Speaker 1: the developers also need Apple to sell the apps and games, right,
Speaker 1: But for too long, Apple hasn't really prioritized its relationship
Speaker 1: with them. In the heady days when iPhone sales were
Speaker 1: going gangbusters, Apple assumed that of course people would make
Speaker 1: apps for the iPhone. Now, with a saturated global market
Speaker 1: for smartphones. That dynamic is shifting. Hi, I'm Brad Stone
Speaker 1: and I'm Alex Webb. And this week on Decrypted, we'll
Speaker 1: look at what Apple is doing to pull off its
Speaker 1: next act as everyone waits for a new blockbuster device.
Speaker 1: Tim Book is trying to show that Apple can keep
Speaker 1: making money even if people are buying fewer iPhones. But
Speaker 1: if you own an iPhone right now, chances are you've
Speaker 1: downloaded many apps from the App Store already. We're going
Speaker 1: to take you inside the world of how apps get
Speaker 1: made and how people who create them make money, sometimes
Speaker 1: even fortunes. It's the changing relationship between Apple and developers.
Speaker 1: You'll hear a lot more about today and why it's
Speaker 1: so crucial for Apple to strike a new balance. It's
Speaker 1: a complicated world, and you'll come out of this episode
Speaker 1: knowing more about Apple's business than perhaps you ever thought
Speaker 1: you would. But stick with us now. It's worth stating
Speaker 1: that last year was something of an Anna cerebelist for Apple.
Speaker 1: They had that drop of revenue to deal with, and
Speaker 1: that turned out to be a serious blow to shareholder moral.
Speaker 1: Apple also got ensnared in some complicated and potentially expensive
Speaker 1: tax issues, a standoff with the US government over encryption,
Speaker 1: and other projects like the self driving car were all
Speaker 1: but shelved. So a lot of people feel like services.
Speaker 1: That's Apple. Software platforms like iTunes and iCloud are a
Speaker 1: bright spot right now, and the app Store is a
Speaker 1: huge part of that. Yeah. Apple expert Gene Munster told
Speaker 1: me the app Store grew more than last year, generating
Speaker 1: eight point six billion dollars in revenue. For context, that's
Speaker 1: more than three times twitters two thousand sixteen sales, though
Speaker 1: it's still only about four percent of Apple's total. Even
Speaker 1: though it's already doing well, Apple has said it wants
Speaker 1: to see the app store start bringing in a lot
Speaker 1: more money than it does today. Tim Cook, the CEO,
Speaker 1: said it explicitly on a cool with analysts in January.
Speaker 1: Services are becoming a larger part of our business, and
Speaker 1: we expect the revenues to be the size of a
Speaker 1: fortune company. This year, Apple realized that if it wants
Speaker 1: to grow its App store sales, it needs to incentivize
Speaker 1: its software developers, inspired them to make more better products
Speaker 1: so that customers spend more money buying them, and that's
Speaker 1: where those changes. Apple and nounced the Developers Conference. Come
Speaker 1: in back to you've all Kaminka the entrepreneur who traveled
Speaker 1: from Israel to here. Tim Cook speaking on stage. He
Speaker 1: started joy Tunes in two thousand and eleven. It's an
Speaker 1: app that teaches you how to play the piano in
Speaker 1: a fun way, like playing video games. But it wasn't
Speaker 1: until last year that things really started to go stratospheric.
Speaker 1: You've all on this team made some changes to their product,
Speaker 1: and they coincided with these revenue changes happening at the
Speaker 1: app store. The change in revenue sharing meant that once
Speaker 1: a customer had clocked twelve months of subscription to an app,
Speaker 1: the card of revenue that Apple would take from developers
Speaker 1: felt a fifteen percent from initially. You've our wondered if
Speaker 1: Apple was simply making superficial changes. Being a cynical person
Speaker 1: like I am, it's you also get worried. Okay, what
Speaker 1: you know? What's uh? Is there anything any hidden interests?
Speaker 1: What does it mean that all of the apps are
Speaker 1: going to do subscription? Now? Is it going to stop? Here?
Speaker 1: Are you going to continue? So far? He's relieved to
Speaker 1: have been proven wrong, like they've been rolling out one
Speaker 1: after the other more capabilities, more data, more analytics, more
Speaker 1: abilities to change pricing in a more convenient way, like
Speaker 1: a lot of a lot of stuff. It just makes
Speaker 1: it so much, so much better. More transparency for developers.
Speaker 1: Believe me, if you make apps for the iPhone, these
Speaker 1: are welcome changes. Until now, Apple had the power to
Speaker 1: dictate many important aspects of how apps were made. We
Speaker 1: have this highly controlled device. This is Cushal Dave. He's
Speaker 1: in charge of technology at the startups scroll dot Com.
Speaker 1: Every application and the content of what it says and
Speaker 1: how you build it and how you release it and
Speaker 1: how you test new features is sort of all you
Speaker 1: know up to Apple's wims. What Crusha is describing here
Speaker 1: are the ways in which Apple can force developers to
Speaker 1: work in a particular way. It was an especially heavy
Speaker 1: burden for people releasing new apps. Small apps trying to
Speaker 1: get off the ground face review hurdles in this pretty
Speaker 1: opaque process and can get totally stuck at any given time. Now,
Speaker 1: obviously a lot of developers have managed to do well
Speaker 1: on the App Store despite all the rules. Adrian Deyong
Speaker 1: is a successful independent game developer, so Apple speaks to him.
Speaker 1: But that's an exception to most people. Apple is a
Speaker 1: black box. Basically, once you submit an app to the
Speaker 1: App Store, Apple controls everything. A group of people in
Speaker 1: the so called editorial team decide which apps get promoted
Speaker 1: on the front page of the store. It can make
Speaker 1: the difference between losing money and making a fortune. Just
Speaker 1: look at Adrian's experience. His new game Hidden Folks, launched
Speaker 1: on the App Store last month Imagine Where's Waldo, but
Speaker 1: black and white and interactive and animated. He and his
Speaker 1: business partner have been working in it for almost two
Speaker 1: and a half years, but after you got featured on
Speaker 1: the app Store, after four days of having Hidden Folks
Speaker 1: on the store, we broke even on it. But members
Speaker 1: of the editorial team don't really talk to developers, so
Speaker 1: nobody knows for sure how they decide what to feature
Speaker 1: and when. Adrian considers himself fortunate because Apple does communicate
Speaker 1: with him, which is very rare, but he's not allowed
Speaker 1: to talk directly to the editorial team. He communicates with
Speaker 1: someone else. The actual editorial team is very much a
Speaker 1: black box. I talked to Apple developer relations people who
Speaker 1: have been assigned to me from the moment my first
Speaker 1: game got on the App Store and was doing really well.
Speaker 1: That was the first time they called me, and you know,
Speaker 1: said from now on, you can just email email me
Speaker 1: if you have questions. Adrian agrees Apple is becoming more
Speaker 1: open with developers, even if they're just small steps for now.
Speaker 1: One example, a few weeks ago, he came to San
Speaker 1: Francisco for the Game Developers Conference. It's a big industry
Speaker 1: event with thirty attendees, and for the first time, Apple
Speaker 1: held a drinks mixer for about forty select iOS engineers.
Speaker 1: That may sound like a tiny detail, but it's actually
Speaker 1: a major change. Outside w w d C, Apple has
Speaker 1: made few significant efforts to meet the people who make
Speaker 1: iPhone apps, let alone talk to them and buy them beers.
Speaker 1: It's crazy, really, I feel extremely privileged. Um these kinds
Speaker 1: of mixers can change my life quite dramatically, Like it
Speaker 1: can make the difference between selling a thousand copies and
Speaker 1: selling a hundred thousand copies, and that's a very dramatic change.
Speaker 1: It's partly about ensuring there's an ongoing dialogue with the
Speaker 1: developer community. It's also about Apple's effort to get more
Speaker 1: returning revenue from customers. People see games as a service
Speaker 1: these days, so you start. The release is only the beginning,
Speaker 1: and that's when you start ending more content. That's when
Speaker 1: you start ending more features, because that's also the point
Speaker 1: where a lot of your fans will get to know
Speaker 1: your game. That's also why Apple decided to change how
Speaker 1: much revenue it gives to developers. In the past, only
Speaker 1: a handful of app categories dealing with content like Netflix,
Speaker 1: Spotify or drop Box could charge a subscription fee. When
Speaker 1: the business community looks at smartphone makers, they often talk
Speaker 1: about the stickiness of devices. In other words, what feature
Speaker 1: does a phone have which makes it harder to switch
Speaker 1: to a competitor to take a phone running Google's Android system?
Speaker 1: For example, With global smartphone sales slowing, the manufacturers are
Speaker 1: fighting for market share, and Apple overtook Samsung in the
Speaker 1: final quarter of helps. Of course, by the recall of
Speaker 1: Samsung's flagship smartphone. Apple has also been masterful at the
Speaker 1: stickiness game. Your music, photos and film library build stickiness,
Speaker 1: the movement tracking, and the health app same thing. Even
Speaker 1: the Apple Watch itself could be seen as a ploy
Speaker 1: to make it harder to dig your iPhone. So for years,
Speaker 1: the app store was seen as a big differentiator for Apple.
Speaker 1: The great apps available for the iOS operating system meant
Speaker 1: that customers would up for an iPhone rather than an Android,
Speaker 1: but there were question marks over just how sticky the
Speaker 1: apps were, as in, how many of these apps do
Speaker 1: you return to every day or even every week. The
Speaker 1: way the app Store was set up encouraged most developers
Speaker 1: to build products which customers would pay for once enjoy
Speaker 1: for a brief spell, than maybe never use again. Newn
Speaker 1: Glen Salveas Pedro is a venture capitalist at Delta Partners
Speaker 1: Group and Strive Capital who invests in startups. Do you
Speaker 1: still need to have actually engagement? You still need to
Speaker 1: make sure as a developer that you're getting people enough
Speaker 1: utility that they will come back to the app on
Speaker 1: a daily basis or weekly basis, whatever makes sense for
Speaker 1: the app right. Opening subscriptions up to everyone and reducing
Speaker 1: Apple's cut gave more developers an incentive to build sticky apps,
Speaker 1: but this move didn't come out of nowhere. In December,
Speaker 1: Tim Cook, the Apple CEO, put a new executive in
Speaker 1: charge of the App Store. His name is Phil Schiller,
Speaker 1: the head of Worldwide Marketing. He was already in charge
Speaker 1: of developer relations. He's one of the masterminds behind Apple's
Speaker 1: glitzie product launches. Behind the scenes, Apple engineers have been
Speaker 1: fighting since at least twenty thirteen too improve the data
Speaker 1: they give developers. Again, that might sound small, but it
Speaker 1: gives developers a chance to understand how people are using
Speaker 1: their app, and it's hard to make improvements without these
Speaker 1: kinds of metrics. Phil Schiller moved a hundred engineers from
Speaker 1: Apple's faltering i ads advertising business to work on new
Speaker 1: tools for the App Store. Within a few months, app
Speaker 1: developers were seeing wait times for approving new apps or
Speaker 1: updates were getting shorter. Right, if you can believe it,
Speaker 1: it was normal for Apple to take a week or
Speaker 1: ten days to review submissions that drafted less than two
Speaker 1: days a few months after Phil Schiller took over. The
Speaker 1: biggest thing that we've seen from Apple which has had
Speaker 1: a real positive influence on that is how they've sped
Speaker 1: out with the review times. That's James Vaughan, CEO of
Speaker 1: Endemic Creations. He talked to me from Bristol in the UK.
Speaker 1: His mobile game is called Plague Inc. Players develop a
Speaker 1: disease with the intention of destroying the world entire population,
Speaker 1: and it has been in the app stores top ten
Speaker 1: since launching five years ago. That's been really significant in
Speaker 1: just get we can get our content out there quicker.
Speaker 1: We don't have to wait if there's something we need
Speaker 1: to fix or we want to get out an additional update.
Speaker 1: We don't have to worry about waiting a week two
Speaker 1: weeks anymore. And I mean that's that's been hugely positive
Speaker 1: as well. That success has given him a front row
Speaker 1: seat for how developers are using another of the tools
Speaker 1: introduced under Phil Schiller, paid search. Developers can now pay
Speaker 1: for their app to appear in the search results for
Speaker 1: certain keywords. Now that's not necessarily good news if you're
Speaker 1: already successful. I mean, what we we tend to see
Speaker 1: quite a bit is the game fALS starting out our
Speaker 1: look around the games that already being search for quite
Speaker 1: a lot, and we'll see thereous games putting in plaguing
Speaker 1: as their search ads to try and get some of
Speaker 1: that search traffic. Not quite sure how I feel about
Speaker 1: that soup or how successful it is, but it's it's
Speaker 1: certainly been something most interesting to see there. Here's the
Speaker 1: trade off for Apple. It wants more developers to make
Speaker 1: more apps, get more downloads, and eventually make more money,
Speaker 1: but it also means more competition for the apps that
Speaker 1: are already successful in the App Store, so faster a view, times,
Speaker 1: improved outreach to developers, different revenue models. But in some
Speaker 1: ways those were all just tips of the iceberg. There's
Speaker 1: also an eight pound gorilla in the room. It's called Google. Yes, indeed,
Speaker 1: Google owns the Android operating system used by most smartphones
Speaker 1: not made by Apple, and Google has its own version
Speaker 1: of the App Store called the play Store, So if
Speaker 1: you have a phone made by Samsung or LG that's
Speaker 1: probably where you would download new apps. The thing is
Speaker 1: Google has great analytics. Google's main business comes from ads
Speaker 1: that appear next to its search results, and that's a
Speaker 1: very data intensive process. So it already has a ton
Speaker 1: of expertise in this area because they've been doing Google
Speaker 1: analytics for for a lot of years. They're very very
Speaker 1: agile around measurements on advertising, etcetera. The investor we had
Speaker 1: from before. For several months now, Apple has been rolling
Speaker 1: out tools which help developers understand how people are using
Speaker 1: and spending money in their apps and let them react accordingly.
Speaker 1: You've all again they added and analytics specifically for subscription
Speaker 1: um His ability to see conversions from from child to
Speaker 1: see subscription events when people are canceling, when people are subscribing.
Speaker 1: Um So a lot of reporting, a lot of analytics
Speaker 1: for that, which is which is amazing, Like, you didn't
Speaker 1: have visibility for this before, so this is a tool
Speaker 1: for you to learn on what people like and dislike
Speaker 1: in in the product. Again, these are all positive developments,
Speaker 1: but Apple has been playing catch up and we haven't
Speaker 1: even mentioned the pressure Tim cook has been under firm
Speaker 1: as investors. We already said glow will smartphone sales slowed
Speaker 1: last year, but Apple gets almost two thirds of its
Speaker 1: revenue from selling iPhones, so it has to prove that
Speaker 1: it's not a one trick pony. Here's the key. Revenue
Speaker 1: from the app Store has a higher profit margin than
Speaker 1: from an iPhone, iPad or Mac. That's because it's software,
Speaker 1: so there's no manufacturing cost. The irony is that while
Speaker 1: Apple is by some distance the most highly valued company
Speaker 1: in the world, with a market cap exceeding seven hundred billion,
Speaker 1: it's by other measures valued less optimistically than Google or Amazon.
Speaker 1: And here's why. Google and Amazon have customers who return
Speaker 1: on a daily or weekly basis to use their services.
Speaker 1: So Google's market valuation is thirty times it's earnings and
Speaker 1: Amazon is a staggering a hundred and seventy three times
Speaker 1: it's earnings. That means for every dollar per share in
Speaker 1: profit that Amazon records, investors give its stock one hundred
Speaker 1: and seventy three dollars in value. Apple meanwhile, there's value
Speaker 1: to just sixteen times earnings, which is why Tim Cook
Speaker 1: talks up the prospects of Apple services business here is
Speaker 1: on the January one earnings call with analysts. Our services
Speaker 1: offerings are now driving over one hundred and fifty million
Speaker 1: paid customer subscriptions. This includes our own services and third
Speaker 1: party content that we offer on our stores. We feel
Speaker 1: great about this momentum, and our goal is to double
Speaker 1: the size of our services business in the next four years.
Speaker 1: Apple is basically admitted that they don't quite know yet
Speaker 1: how they're going to reach that goal, but they've made
Speaker 1: the first steps. The app store is seeing robust growth. Counterintuitively,
Speaker 1: James Vaughan's game Plague, Inc. Has seen its position in
Speaker 1: the grossing charts how much total revenue it makes decline
Speaker 1: in recent years. Now that potentially sounds like it's a
Speaker 1: big problem, but actually it's not it's not in the
Speaker 1: flight is our revenues state broadly constant that the only
Speaker 1: reason why we're going down the grossing chart is because
Speaker 1: the absolute is just making more and more money every
Speaker 1: All the private A pie is just getting bigger and bigger.
Speaker 1: So all this data that Apple is starting to supply
Speaker 1: to developers is helping them build products which can be
Speaker 1: carefully tuned towards customer demand. I think the notion that
Speaker 1: you can just create an app and it will do
Speaker 1: very well is sort of slowly disappearing UM, which is good.
Speaker 1: So the very very early stage UM apps that we
Speaker 1: see UH sort of the what I call the two
Speaker 1: men and a dog type type teams. UM. The ones
Speaker 1: that do exist are much more thought through. A final
Speaker 1: word from Uvalcamina, the developer we heard from at the
Speaker 1: very start, to means this change means that Apple is
Speaker 1: serious about building bigger businesses that depend on the App
Speaker 1: store ecosystem, and I think it's going to be I
Speaker 1: think it's it's a very big win. It's a very
Speaker 1: big bet on their part. So Alex, in conclusion, is
Speaker 1: the app store really the next big leg on the
Speaker 1: Apple revenue store? Has no doubt. Many investors hope the
Speaker 1: way that Tim Cook talks about it, their revenue from services,
Speaker 1: which also includes things like iTunes and the I Cloud,
Speaker 1: will be above fifty billion dollars by now. Apple does
Speaker 1: about a hundred and fifty billion dollars in iPhone sales,
Speaker 1: so it's certainly got a very good chance of being
Speaker 1: a size of revenue contributor. But for the foreseeable future,
Speaker 1: Apple is going to remain the iPhone company. Yeah, I
Speaker 1: think these changes are promising. I mean, what we what
Speaker 1: we've seen with a lot of successful apps is subscription
Speaker 1: models work Pandora, Spotify, Netflix, That app store commission was steep,
Speaker 1: and you could tell that companies like Netflix would go
Speaker 1: out of their way to avoid signing people up via
Speaker 1: the app store. So with these changes, and with Phil
Speaker 1: Schiller now in charge of the app Store, it feels
Speaker 1: like Apple starting to make some changes that are receptive
Speaker 1: to the demands of these companies and how they want
Speaker 1: to interact with customers. And that's it for this week's
Speaker 1: episode of Decrypted. Thanks for listening. Do tell us what
Speaker 1: you thought of the show. You can write to us
Speaker 1: at Decrypted at Bloomberg dot net or find me on Twitter,
Speaker 1: I'm at a t B web and I'm at brad Stone.
Speaker 1: Don't forget to subscribe to us on iTunes or wherever
Speaker 1: you get your podcast and leave us a rating and review.
Speaker 1: It really helps new listeners find our show. This episode
Speaker 1: was produced by Peter Gadkari Archie Ito, Liz Smith, and
Speaker 1: Magnus Hendrickson. Big shout out to Robin and Yellow, who
Speaker 1: edited the article I wrote alongside this podcast. You can
Speaker 1: read it at Bloomberg dot com Forward slash Tech. Alec
Speaker 1: McCabe is head of podcasts. We'll see you next week.