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Has Apple just screwed the business model for selling software?

By on January 10, 2011

Last week, Apple launched an app store for Macs.

This marks the beginning of the end traditional software business.

Mac AppStore

Apple has already show a new way of selling software using the three-way integration between the iPhone, the App Store and iTunes. From a business perspective, the most important aspect of this integration is not the seamless purchase path and the high conversion rates; it’s the way it has reduced distribution costs to close-to-zero.

When distribution is free

Software, like most content, is expensive to create. It requires skilled engineers, programmers and product managers to get right. However, like most content, it is inexpensive to distribute.

Actually, what I mean is that it used to be expensive to distribute’; now it’s cheap. The old model involved boxes and shiny discs and glossy packaging. The new model involves digital download. Making one more copy of a piece of software is incredibly cheap. So cheap as to be almost free.

What happened on the iPhone when distribution was free

if you put a product up on the iPhone App Store, distribution is free. The bandwidth costs are swallowed by Apple as a cross promotional tool to sell its hardware. If you give away a free app, and never make any money from it, Apple doesn’t charge you anything. If you make money from it, Apple charges you 30%.

This truth – that distribution is effectively free – has seen a rapid change of business models on the iPhone. Initially, games launched at a price point to compete with PSP and DS titles. By December 2008, the average price of an iPhone app had fallen to $1.58. Before long, the Freemium model emerged and now 34 of the top 100 grossing apps are free, with revenues generated from In App Purchases.

Expectations are changing

it was easy to charge for software when it came in a box and had associated physical costs. No, scratch that. It was essential to charge for software when the marginal cost of distribution was meaningful. To put that another way, if it cost you real money to make one more copy, which it does with a physical copy, you need to charge real money for a copy.

This is not true in the digital era. However, many business models have not evolved to reflect this. (Obviously the software-as-a-service model is an evolution in this direction.)

The Mac Appstore brings smartphone style pricing to the desktop. Smart SaaS companies will look at ways of making their software available for free via the distribution mechanism of the App Store, and using their existing upsell expertise to generate revenues. Startups who can’t afford the marketing budgets to compete with incumbent software business will launch freemium products via the appstore (like Zynga and Playfish did on Facebook; like ngMoco and Nimblebits on iPhone). Companies who only know how to sell premium priced products as software downloads are in trouble.

The Mac App Store is the deathknell for selling software in boxes. When it comes to the PC (and there is about to be a bun fight for the position as the desktop App Store), it will start driving prices down to zero.

Watch the smart phone arena closely. That’s what the desktop market will look like in 2 to 3 years.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: