Content has been a primary driver of smart phone adoption. In the first few years, apps were critical. Apple and Google focused on courting developers and released developer counts and application download metrics, ticking off the billions.
Google and Apple are most recently competing by filling out the catalog of books, movies and music with the release of iCloud and Google Music, Movies and Books. This strategy has worked remarkably well. Last year, the average iPhone user spent $100 on apps, books, movies and music. Mobile app downloads have increased 61% year over year. The iTunes store generated $1.5B in sales last quarter. Content is working as a standalone business. But it’s part of a bigger plan.
More than just a profit center, content is a stepping stone for driving cloud service usage. As users buy more movies, songs and books, there is an opportunity to lock customers in. When shopping for a new phone, after having spent $100 on movies on iTunes, the chances you’ll switch to an Android device? Much smaller. All your contacts, apps and music sync’ed to a Google cloud? Hard to say yes to iOS.
Cloud backup solutions for content and user data are great lock in mechanisms – they dramatically increase switching costs. This lock in is exacerbated by Google and Apple bringing their content stores to the TV with AppleTV and GoogleTV.
Because of the resultant increase in user lifetime and consequently lifetime value, Google and Apple can cut margins from content delivery businesses and make their cut on transactions in market places. This is a luxury point solutions like Spotify, Rdio and even Netflix can’t afford. Content delivery is the core business for these companies. Over the long run, there will be pricing pressure and margin compression on point solutions and very likely some acquisitions.
Amazon, who has the majority of services Google and Apple offer (books, movies, music and an app store) faces a difficult distribution challenge. They compete directly with Google and Apple for content sales market share. Amazon payments is a fantastic asset, but to be put to use, Amazon must win significant share of app store downloads. One approach is to follow Baidu by building a web-based app store.
The second would be to partner or even acquire a mobile phone carrier, like TMobile. By powering the app and content stores on TMobile handsets, Amazon could win 33M customers overnight. Amazon could sell Kindle devices and tablets in TMobile stores. Incorporating Amazon payments, Amazon could become a very powerful player in the mobile ecosystem. With Amazon at $100B market cap and TMobile facing a $39B acquisition offer from AT&T, the math could work. And suddenly, the mobile landscape would be quite different!