Blog Post

The Danger of Playing in Apple’s Walled Garden

Every so often a news item comes along that reinforces the downside of building your business on someone else’s platform, and this week’s poster child is iFlowReader, an e-book app for the iPhone (s aapl) and iPad. The company behind the app announced Wednesday that it’s shutting its doors for good, and it puts the blame for its demise squarely on Apple and its new 30-percent levy on in-app sales. The benefits of getting into bed with Apple are obvious: access to a huge universe of motivated users and built-in payment handling. But the downsides for those who play inside Apple’s walled garden should be just as obvious — namely, you lose control over some fundamental aspects of your business.

The bitterness that iFlowReader feels about Apple suddenly changing the rules of the app game spills out of every line in the company’s blog post, in which the company advises users that it will be “going out of business” as of May 31, and that this is a “sad day for innovation.” The post goes on to say that:

Apple is giving us the boot by making it financially impossible for us to survive. They want all of the eBook business on iOS and since they have the unilateral power to get it, we are out of business and the iFlow Reader is dead. We put our faith in Apple and they screwed us.

The company notes that one of the other culprits in its financial demise was the “agency model” that many book publishers have adopted for sales, which gives the publisher the right to set the price for their e-books, and gives any seller (such as iFlowReader) a flat, 30-percent commission. The rise of the agency model is also primarily Apple’s doing, since offering that model to publishers was a competitive move against Amazon (s amzn) and the dominant position it had in the e-book market.

The combination of the agency model and Apple’s 30-percent fee on in-app transactions made it financially impossible for iFlowReader to survive, the company says, since the 30-percent charge “is all of our gross [profit] margin and then some.” And the founders — who say they spent more than a million dollars developing the app — also allege that Apple knew it would eventually kill iFlowReader’s business model, even while it was approving the application for sale in the Apple store.

Apple can change the rules at any time and they did. Sadly they must have known full well that they were going to do this. Apple’s iBooks was already in development when we talked to them and they certainly must have known that their future plans would doom us to failure no matter how good our product was. We never really had a chance.

Apple is hardly the only company that has destabilized or even killed a startup’s business model by making such changes: Another e-book player, the Lendle book-sharing service, got a nasty shock recently when Amazon suddenly changed the terms of its API and the service stopped functioning. And Twitter has also raised the ire of developers by enforcing restrictions on the use of its data and shutting down certain apps. But no one controls the purse strings of a startup’s business quite like Apple does when you enter the App Store.

As some observers have pointed out, iFlowReader would still be alive if it had also developed an HTML5 version of its service for the open web, rather than putting all of its eggs into Apple’s basket. But the lure of the iOS platform is great. The iPhone and iPad are huge growth engines, and apps that can tap into that have become massively successful almost overnight. Unfortunately, as media companies of all kinds have discovered, that kind of potential success comes at a great price, which is why some publishers such as Fortune (s twx) are experimenting with web-based services instead of just apps.

Would iFlowReader have failed even without Apple’s new fees? Perhaps. But the fact that the company changed the rules for content-based app makers so dramatically probably pushed it over the edge, and theoretically it could do the same to anyone. That’s just the nature of playing Apple’s game — the house always wins.

Post and thumbnail photos courtesy of Flickr user Giuseppe Bognanni

56 Responses to “The Danger of Playing in Apple’s Walled Garden”

  1. Ricardo Santos

    So basically you are saying that is ok to eliminate competition based on monopolistic practices.

    FYI iBooks was created AFTER the fact. So the company did based its offering on something that Apple did not have.

    Capitalism is based on competition. Without competition, it does not work. Yet, companies are allowed to ban competing stores. And no body seem to see anything wrong with this.

    There is a presedent on this. Car manufacturers used to void your car warranty for using any part (even oil) that they did not agree with. Then congress pass a law changing this.

    Congress can make this right if enough people decided to support an anti monopoly law.

    • “Yet, companies are allowed to ban competing stores”
      They didn’t “ban” them, iFlow just chose a non-competitive business model where they had no revenue flexibility. As I mentioned earlier, CDbaby does fine, they get their commission from the artist. iFlow locked themselves in where they couldn’t get that out of their authors/publishers.

      Bad analogy on the car companies – Does not relate.

      And, Apple doesn’t have a monopoly, they run a huge store/mall and charge rent – Don’t like it, move to that low-volume strip mall down the street where the rent is cheaper.

  2. freediverx

    The only lesson here is that iOS developers shouldn’t base their business model around trying to reproduce features and services that Apple already offers directly. Apple has iBooks. Don’t go crying if you bet the farm on the concept of selling digital books on iPhones and iPads.

  3. For those of you blaming iFlow for their demise, you should read interview with the founder that goes into the gory details:

    It’s an eye opening read that illustrates the absolute totalitarian control Apple has over marketplace. The fact that other developers will not speak as candidly as iFlow founder is another sign of fear of Big Brother, Apple.

    • Eye opener in what way? Just reiterates that they had a bad business model and not well thought out. They wanted to be a retailer working within another retailer’s building. I’m surprised they thought that would work even initially.

      View it in an offline world – You’re doing a business plan and it’s based on setting up your retail shop (with retail margins) within a Barnes/Nobles store. You’d just know that ain’t gonna work. Even if you get away with it for a time B&N is going to start charging you rent at a minimum if not throw you out on your ear to begin with.

      Apple didn’t build their retail environment for other retailers/middlemen, they built it for manufacturers/publishers and take their cut for providing the retail space.

      Now, if they had a slightly different model where the proposition for the writers/publishers of eBooks was…We’ll set up a shop, handle getting your product listed/sold and for that, we take a 30% cut of of your revenues from that online retail store, they’d be fine. In this case, they are a service rather than a retailer trying to taking a cut off list price.

  4. eldernorm

    Yep.. Bad Apple, Bad. You are not doing things the way we want you to. You refuse to kiss our but*s and let us make money anyway we want. Terrible, just terrible.

    While I am sorry to hear that a company is looking at closing its doors, blaming Apple for being a closed system and creating and developing world changing things is just not going to get my attention.

    I hear there was this guy that invented a really great new buggy whip and then Ford came out with this new “auto” thingie… Shame on Ford…. Shame.

    Just a thought,

  5. Great article. I am surprised it hasn’t gotten more coverage.

    I am not familiar with the company and app, but I find it odd that iFlowReader would just close up shop rather than porting the app to Android, Blackberry, Windows Phone 7, HTML5 etc. etc.

    • Read in another thread that they couldn’t as they are dependent on Adobe DRM. They didn’t control their own tech so had limited options. There’s probably a lot more to the story then iFlow is revealing I’d bet.

  6. Yup, yup. Just look at all those thousands of other apps falling by the wayside, dying like flies. It all must be Apple’s fault. Even if it’s not happening.

    Those folks making money? Just part of the plot to fool you all into thinking the marketplace has somehow become easier than it really is.

    Let’s call a Congressional hearing and order Apple to change their marketplace to conform to the needs of every developer who enters into that marketplace.

    Crap ideology.

  7. Great story. As a developer, I can tell you this risk has *always* been there.

    Back in the days of DOS & Windows, if you developed a popular app using Microsoft API, they would turn on you by putting out a competing product and killing your business.

    Likewise, Google will not allow Android apps that competes with it’s cash cow business: mobile ads.

    The solution, as others pointed out is to develop with an eye toward cross-platform compatibility.

    BTW, Apple does it too by making sure OS-X is totally portable to any processor: Intel, PowerPC and ARM. Never put all your eggs in one tech basket.

  8. Joseph

    “The rise of the agency model is also primarily Apple’s doing, since offering that model to publishers was a competitive move against Amazon and the dominant position it had in the e-book market.”

    This statement is patently false. The agency model is and has been the standard and almost universal sales model for books, where the retailer is basically acting as a sales agent of the publisher and the retailer earns a commission on book sales. In Apple’s case, the commission is 30%. It is Amazon that tried to use its strong retail position to move toward a licensing model, giving Amazon a licence to the books themselves and a larger slice of the profits on sales. Apple basically said to the publishers, hey, electronic is just another format, so we’ll sell your ebooks under the same model that physical retailers sell paper books. I’m not sure whether the people at iFlowReader are dumb or being dishonest when they write on their blog that Apple is responsible for the rise of the agency model. Either way, you’re misinforming your readers when you repeat it.

  9. Some thoughts…

    The agency model gives Apple 30%, publisher 70% – Why does everyone think Apple should give up anything – Why not the publishers taking 70% of the remaining 70% and giving other middlemen the 30% they want of that. It’s not an necessarily an Apple problem if a retailer/middleman is squeezed on revenues.

    I suppose one could consider them an enabler like CDbaby for bands/music. Apple still takes their 30%, CDbaby takes it out of the remaining 70% and gives the rest to the band/musician (as I recall). Again, it seems it’s not really Apple’s concern, CDbaby has a model that works no matter Apple, these guys didn’t.

    They’re using Adobe DRM so they seem to be just a pass along retailer. Probably couldn’t take it to the web considering that and who knows what they have to pay Adobe.

    Just seems they had a very shaky foundation all around and were destined to fail at some point anyway.

  10. The perfect legal case!
    1 Forget contract
    2 If Apple knew alternate rules may come in force at contract signing – they’re gone!
    3 Who has the $$ to fight!

  11. Oh Blah Dee Blah Dah

    RE: “…The rise of the agency model is also primarily Apple’s doing, since offering that model to publishers was a competitive move against Amazon and the dominant position it had in the e-book market…”

    REPLY: Apparently, Apple responded to a market competitor, and iFlowReader became a victim of friendly fire. What should Apple have done? Let Amazon keep a competitive advantage?

    Obviously, the answer is no; Apple didn’t and it won’t in the future.

  12. iFlowReader App Developers are cry babies: Bitch moan and whine about your own product being sold in a vendors store that pays for all storage, advertising, distribution, sales, taxes, billing, and on and on and on.. It is not Apple’s fault that the book CO. sets prices of its books. That is like a Gas Station crying because the price of oil falls and the Gas Station does not make more profit during falling prices. You don’t hear the developers of “Angry Birds” saying the %30 is too much. Apple is providing a service, if you don’t want the service don’t develop for it. iFlowReader developers signed an agreement of %30 payment of all monies go to Apple.

  13. Matt, your piece seems to blame Apple; stating the dangers of playing in their walled garden. This assumption is wrong.

    What I think you’re missing is this risk exist in every single business, walled or not. If you build your entire company around one single client you’re playing with fire.

    Peter Lynch recommended against ever investing in such companies in his excellent investing book, One Step Ahead of Wall Street. Technology company or not, walled or not.

    IF my entire business is made up of supplying widgets to XYZ Inc, I’m completely at the whims of XYZ.

    iFlowReader made a gigantic mistake in their business model. It has nothing to do with Apple’s walled garden— and crying about it doesn’t help anything.

    • That’s a fair point, Xian — I agree that basing all of your business on a single provider or platform is a bad idea. But changing the rules of the game in such a dramatic way is also not really fair.

  14. Nick From Montreal

    Great story. As a developer, I can tell you this risk has *always* been there.

    Back in the days of DOS & Windows, if you developed a popular app using Microsoft API, they would turn on you by putting out a competing product and killing your business.

    Likewise, Google will not allow Android apps that competes with it’s cash cow business: mobile ads.

    The solution, as others pointed out is to develop with an eye toward cross-platform compatibility.

    BTW, Apple does it too by making sure OS-X is totally portable to any processor: Intel, PowerPC and ARM. Never put all your eggs in one tech basket.

  15. It’s a good indication of how weakly the iBooks/iBookstore is performing that Apple feels it has to target a player as minor as iFlowReader. We can only imagine the anger Apple’s executives must feel toward Amazon’s highly successful Kindle. It’s sales steal some of the thunder away from the iPad’s success. I suspect the Kindle app will not be with us much longer. I’d hope that wouldn’t happen.

    Not that that matters much in the larger scheme of things. If the current pattern continues, in a few months the only way to get a recently published ebook on one of Apple’s mobile devices will be through Apple. If the iBookstore doesn’t have it, you can’t get it. If you read a lot, you’ll want to own a Nook or a Kindle. The iPad won’t be for reading.

    A year ago, if someone had asked me to explain, from a reader’s perspective, the key difference between iPads and Kindles, I’d have said, “On the iPad, you can buy ebooks from many sources. On the Kindle, you can only get them from Amazon.” Then that was true.

    Now things are moving rapidly in the other direction. iPads are becoming a closed system while Amazon is doing something I thought they’d never do. They are working with libraries to let you check out books on a Kindle. I was so impressed, the Kindle 3 that I ordered arrives this afternoon.

    The future may be even more startling. Amazon already lets what must be hundreds of vendors sell through their store for a slice of the sale. They could do the same with Kindles. In the future, you may be able to buy ebooks directly from publishers and specialized online ebook stores and have what you’ve bought transferred to your Kindle via Amazon’s already existing email-document transfer.

    Think about it: Kindles as an almost totally open ereading system and iPads as tightly closed as tightly as a miser’s wallet at Christmas. I never thought I’d see that.

  16. beenyweenies

    At a certain point, the potential customer base for iOS apps is meaningless when the potential for actual profit is so slim. After all, the average developer barely recoups their investment when all is said and done. The big winners like Rovio are app dev equivalents to winning the lottery.

    That reality is only amplified every time we hear about a developer’s business model being obliterated by some capricious new Apple policy, which have gradually become more and more hostile to developers in general, rather than working in their favor. Apple seems to think they can attract and keep developers by adding new APIs and tools twice a year, when it’s stability and consistency they need. At some point, Apple will need to give as much as they get, or they are in for real trouble.

    Given that Apple’s profit is derived from hardware sales, NOT app related revenue, I don’t understand why they’d risk a developer revolt or even bad press behaving this way. A 30% cut on in-app sales is nothing compared to the lost hardware sales they’ll incur if the winds shift away from them.

  17. I think the real lesson here is – and it shouldn’t be a surprise – If you’re a retailer (iFlowReader was), you’re probably not on real solid footings if you plan on retailing within another retailers store. Can you imagine an Amazon store within BestBuy or within their website? Tenuous at best.

    • That’s true — except that Apple approved their app and apparently told them that their approach was fine, and then changed the rules. Totally within their rights, of course, and perhaps not surprising, but still kind of unfair.

      • I don’t think fairness enters the equation at all. Apple is in the business of making money, and they’ll make rule changes whenever and wherever a revenue opportunity necessitating those changes arises. In this regard, they’re no different from Google, Facebook, Twitter, etc.

        I haven’t used the app in question, so I can’t vouch for its quality (or lack thereof), but it seems pretty clear to me that if you’re in the business of selling something and are 100% reliant on a single sales channel (and one entirely out of your control, no less), you haven’t built a very smart business. It’s sort of like selling through Costco or Walmart — the channel is great until it isn’t anymore. If you don’t have a plan B, it’s your own fault.

      • Yes, and they pay Amazon transaction fees. In those cases, Amazon is more like an eCommerce platform, clearing house and merchant bank.
        I heard once that Amazon makes most their money on the float rather than actually through retailing.

    • iSkeptic

      The idea that anything sold through an ipad app is, by a grand extension of Steve Jobs’ property rights or something, sold inside Apple’s App Store, or some other Apple virtual property , is not entirely obvious. The big one to watch on this front is Amazon itself and the ipad Kindle reader. Amazon is not in any better position to pay 30% off the top to Apple on ebooks than the iflow people were. So far Apple has been reluctant to push that one to its logical limit though. Netflix would seem to be in a similar position.

      • Agree that Amazon/Kindle is similar (selling stuff) and will be interesting to see how that goes. Netflix is rental/subscription so probably falls under different terms I would think.

  18. Apple is Double-Dipping!
    I agree with other posters that iFlowReader does not bring anything new to the iPhone, yet from a philosophical view, Apple is unabashedly taking full value from both its customers AND suppliers. That is *pure greed*! If the iPhone, for example, was free, then, and only then, the suppliers – the app developers – should need to fully support the platform somewhat like Google’s model where the advertiser pays.
    It’s obvious that IOS device owners are not truly owners. They lease Apple’s products and pay for the right to access whatever Apple can make money on and little else.
    Having said that, I am a great Apple fan and want to see them continue on their innovative roll but I wish they would be a little generous and let everyone share in the success that, without all of us, Apple would not have.

    • Agreed, and I think Apple will discover soon enough that their harsh stance and stoic attitude will scare more and more developers away in Google’s direction.

      Personally I think Google is becoming scarier by the minute…
      If it depends on Google, in the next few years they will own EVERYTHING you do on the web. That alone may be reason to stick with Apple.

  19. Annon

    Sorry to say this , because it is someONEs business getting squeezed.

    You are a fool to rely only on apple. (actually dev on apple makes a fool )
    Especially because they run a closed shop , open only to apple subscribers , controlled STRICTLY (for profit) by apple.
    Their rules. Their ways. ( If they want your app , oops.. )Their app.

    Apple is a money making machine , not an environment for devs , not a platform for software/games etc..
    You should be aware of that well before you invest all your coding time working FOR them.

    Coding for windows and similar OPEN (to dev for )os structures is much better from a dev control point of view.
    ** YES .. windows is OPEN for devs . Microsoft don’t get a percentage of every app sold for their various os.

    Point is….. Don’t dev for apple , look at their hardware and think , they will rip off the devs as much as they rip off hardware buyers.

    • motionblurred

      This is a ridiculous comment. Had they chosen to distribute through Android, a supposedly open platform, they wouldn’t have survived either with the cut that Google takes on subscriptions.

      As for Windows, they’ve done far worse things than Apple or Google for the past twenty years, even trying to control the web through ActiveX. They’ve stolen ideas of others and used their powerful leverage to kill those companies.

      I’m not a fan of what Apple did but don’t pretend that Apple is the exception to the rule.

  20. Matthew: please tell me you aren’t THAT stupid and gullible to write this tripe with a straight face. The reason iFlowReader is closing shop: it’s a shit app. It wasn’t worth the money being asked for it or it would have sold like hotcakes. It has *nothing* to do with Apple’s take of the sales price or Apple’s rules of the App Store or the agency model of book-selling and all the rest.

    In business, the company must adapt to market changes or else close up shop. When was the last time you saw an AMC on the road? This article is a good laugh, thank you!

    If iFlow reader were a good app, it would have sold. If it were good enough, it would have sold enough to sustain what the devs were hoping for. It’s a typical entitlement bullshit attitude. It was a really stupid business decision to create an eBook reader and try to sell it when iBooks, Kindle, Google and so many others are available for *free*. Putting “faith in Apple” has nothing to do with it. It’s about putting faith into your product and customers believing in it. Fact: the sorting of apps in the App Store have been changed to take actual *use* into ranking. If their app were any good, it would be *used* a lot… apparently not enough that it sinks in ranking… but no, it’s Apple’s fault!!!

    The iFlowReader devs should go develop for Android and ChomeOS. Only to find their hard work pirated within *hours* of release. Seriously, they as developers and you as a writer all really need to get a clue about what makes the world go round.

    Frankly it’s articles like this as to why so many take all articles like this totally tongue-in-cheek and don’t take the blogs they appear on all that seriously.

    Thanks for the hard laugh, though.

  21. Mrcap

    There will occasionally be some apps that will take bigger risks with the rules and fail but the overwhelming success of so many more is the real story. If the developer did not see this as a potential result then they were very naive.

    • Kent Moffat

      As a product marketing guy, I’m always asked to weigh all of the competitive risks and make appropriate mitigation plans. It sounds like the iFlowReader folks failed to effectively perform this critical business planning task. I do have some sympathy, but the tenor of their blog post towards Apple feels a bit over the top in that it they don’t seem to be taking any of the responsibility for failure onto themselves.

  22. Lucian Armasu

    The really bad part about Apple’s new policy is not that they takes 30%, it’s that they take 30% and won’t allow you to raise prices to compensate for their cut. That is simply mind-boggling and they obviously did this intentionally and knowing that they will take out of business a lot of service based companies that rely on iOS only for their revenues and haven’t branched out on Android or the web yet.

    But yes, for whoever wants to escape this new policy of Apple, they need to build a HTML5 web-app. If threatened by Apple with the same policy, (which would also mean taking all their profits) Amazon and Netflix could easily build a web-app for their services since they are already experienced with HTML5. Amazon demo-ed a beautiful webapp reader last December and I believe Netflix has already converted to HTML5 web-apps for set top boxes and such.

    Lesson to be learned: don’t trust Apple if they are moving to compete with you, and take the necessary precautions if you have an iOS only business.

    Here’s one of the live developers sessions at Google yesterday for web apps. The NYT guy says at the end that HTML5 web apps are the future even for mobile platforms:

  23. Viswakarma

    One has to think very carefully as to the type of applications one is developing. The problem with iFlowReader is that it is a gold-plated e-book reading application. It does not add a new dimension to the App area.

    • AlanLindsay

      You missed the fact that this app came out BEFORE many of the others. When it came out it DID add a new dimension. The problem is that Apple changed the rules on them after they were up and running.

      And as to the HTML5 comment – sure – they might have survived if anybody actually was a customer for that model.

      Instead of finiding rinky dink reasons why they might have made it under other circumstances, why not take the fact that they didn’t under the actual circumstances more seriously?

  24. I fee really bad for this company. What Apple is doing is such a terrible thing. AND it’s just going to get worse.

    Long story short: Right now Apple’s letting all the dev’s do the hard work by creating applications that make people want iOS devices. Face it – without applications, who wants something that runs nothing? So we’ll have a few more years where Apple sits back and watches. Then what’s happened above will happen on a very large scale when Apple decides that it can just create the applications themselves and or change their terms again making devs earn less than minimum wage.

    Goodbye developers. Hello to more work shipped over to China.

    I’m glad to see covering this, as maybe iFlowReader’s experience will prevent the same from happening to others, and coverage of things like this will help people and/or companies make the most informed decisions.

    • Peter

      I’m not sure I agree with you 100%, but you’re somewhat correct.

      Remember way back when Steve Jobs was asked about books and his comment was that “nobody reads anymore.” Apple was more than willing to let third-parties twiddle away in this market.

      Suddenly, though, Apple noticed these people were actually making money. “I guess people do read after all!” I imagine Steve thought. So Apple decided to open their own bookstore.

      Of course, initially, they didn’t have much for titles. So they sold the publishers on the “agency model.” That hurt Amazon a bit, but Amazon’s Kindle has become synonymous with portable e-books. So Apple’s little bookstore is still having problems competing.

      So, the solution is, if we can’t beat them in sales, we’ll take 30% of their money. Apple can do this, of course, because they own the platform.

      The analogy I had awhile back was that Apple owns the mall (iOS) but they didn’t have much for shops. So they were quite happy when the big book seller Amazon opened a big warehouse store in their mall. But when they saw how much money Amazon was making selling books, they decided to open their own bookstore. When they discovered they couldn’t compete with Amazon, they decided they’d raise Amazon’s rent until they could.

      Apple would like to see third-party developers succeed–they just don’t want them to see enormous success.