The Internet Revolution: It’s Not Social OR Mobile, It’s Apps

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We believe that the Internet economy is in the midst of a revolutionary paradigm shift from the neutral browser of the PC era to the tightly managed App model.  While the growth of social and mobile applications have spawned significant new businesses, the evolutionary pace of change has allowed nimble incumbents to adapt.  The shift to Apps is more radical, allowing platform masters – Apple, Google, and maybe, Microsoft and Amazon – to manage their users’ web experiences by integrating functions into their platforms, setting default Apps and controlling the store through which Apps are distributed.  We believe that the App model will allow the platform masters to co-opt much of the value as the web absorbs opportunity from the rest of the economy.  3rd parties will need critical mass and sustainable competitive barriers to thrive and, we fear many will not.  Even well positioned Apps, like Facebook and Twitter, may find it difficult to monetize their business in adjacent opportunities due to the power of the platform owners.

We believe that the defining factor in the changing web paradigm is platform control.   Many pundits divide Internet history into eras, asserting a “Web 2.0” era driven by the rise of collaborative social applications.  While Web2.0 innovations spawned new businesses, they played out over years and nimble players easily navigated the changes.  Mobility is also evolutionary, enabling new business models but not prohibitive to established franchises.  However, the shift from a neutral “browser” model, to a platform owner controlled “app” model is revolutionary.  Unlike PC browsers, mobile platforms push Apps for direct access, allowing the platform to manage the user experience via pre-loaded defaults, integration of certain apps to the use of the device itself and tight control of the App store.  By this mechanism, platform owners can favor their own services and those from which they receive fees.

Cloud-based services are now the primary purpose of consumer computing, with trillions of dollars of opportunity addressable.  Most major consumer applications– e.g. E-mail, search, e-commerce, media streaming, navigation, content sharing and social networking – are inherently cloud centered.  Even traditional applications – e.g. office productivity, games, content creation/editing, and file archives – have cloud-based alternatives with functional and cost advantages.  As platform owners push functionality to the web, they will disproportionately benefit as the Internet absorbs value from the rest of the economy.  For example, Internet penetration into the huge global retail and advertising industries is small, but growing rapidly with enormous room for future growth.

Apple, Google, Microsoft and Amazon are in position to take the lion’s share of Internet opportunities.   The iPhone’s intuitive and integrated user interface was ground zero for the “app” model, which has been emulated by Google, Microsoft and Amazon for their platforms.  Statistics show that users of mobile platforms are far more likely to access internet-based services via apps than through their browsers, giving enormous advantage to integrated functions, default apps and apps favored in the platform owner controlled store.  As smartphones and tablets overtake PCs as the primary mode of consumer web access, these platform owners have the first crack at serving advertising, selling services, and facilitating transactions to users, and can absorb opportunities targeted by 3rd party apps by integrating similar functionality into the platform or favoring an alternative app.

App driven companies must sustain differentiation, and circumvent the influence of platforms, or risk irrelevance.  Stand alone applications have always been vulnerable to the power of platform integration – the DOJ famously forced Microsoft to disintegrate Explorer after it laid waste to Netscape and others.  Apple’s tight integration of iTunes stymies other media distribution solutions on its devices.  Google’s integration of its own apps – Search, Maps, Places, Google+, Play (books, music, movies, apps), Talk, YouTube, Drive, Voice, etc. – into Android attacks a wide swath of web-based businesses.  Amazon, fearing eventual disintermediation, built its Kindle interface over Android and moved its own e-store to unavoidable prominence.  Against this tide, independent app companies must differentiate themselves with their target customers, build critical mass and establish sustainable barriers to competition from platform integrated alternatives.  Examples of well positioned App companies with scale and barriers include Amazon, Facebook, OpenTable, Twitter, and Hulu.

Even successful, differentiated, sustainable apps, like Facebook, may be stymied in addressing adjacent opportunities without a platform.  Facebook’s revenue projections assume that it can lever its 900 million users to capture advertising and sell web-based services – e.g. media streaming, games, e-tail, etc.  However, in the emerging platform dominant model, the platform owner will have first crack at serving advertising and selling services before the user hits the app, and can be expected to relentlessly move to break competitive barriers and siphon value into their platforms.  As Amazon felt it necessary to establish its own platform, Facebook may need to gain greater integration into a mobile platform to achieve its manifest destiny.  We remain intrigued with the potential for co-operation with Microsoft, and its Metro-based Windows Phone and Windows8 platforms.

For the full research note, please visit our published research site.
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