Ten Years of the App Store: The Decade Apple and Google Redefined the Software Business | QDaily Business History

Meanwhile, software went from a productivity tool to something you consume, much like television.

Apple's and Google's app stores were born the same year, three months apart.

In July 2008, Apple's App Store arrived alongside the second-generation iPhone. Google's Android Market opened that October, a month after the first Android phone went on sale.

After that, everything changed.

Ten years ago you waited by the roadside for a taxi, kept a separate GPS unit in the car, paid for a meal in cash or with a card, pulled out your phone mainly to call and text, and the social networks that supposedly connected the world had nothing to do with you once you shut your laptop. To kill time on the road, you subscribed to China Mobile's mobile newspaper service.

But the timing of this upheaval was something of an accident. By each company's own plans, neither app store was supposed to launch that year.

Apple's biggest obstacle was its legendary founder, Steve Jobs, who had resisted the idea of an app store since the earliest days of iPhone development.

It wasn't that Jobs thought software belonged on a disc. Quite the opposite — he had spelled out the concept of an app store as early as 1983, saying in a talk:

"Software is just information, and information is expressed as a bunch of ones and zeros. Right now we write those ones and zeros magnetically onto plastic disks, package them up with the manual, load them onto a truck and ship them to dealers. The dealers take them off the truck and put them on a shelf — that wastes a lot of money. Then a customer walks in, takes it home and stuffs it into a computer, where it turns back into electronic information made of ones and zeros. That's a pretty absurd way to do it. We're going to send this stuff down a phone line instead. To buy software, the ones and zeros will go straight from one computer to another."

Today's app stores differ from that description only in that the "phone line" has become a cellular signal. Back then there was no Mac yet, and Microsoft's Windows was still in development.

But by the time the iPhone launched in 2007, Jobs was firmly against running third-party apps on it, worried that they would make a mess of the phone and break the integrity of the system experience. Many Americans called the first-generation iPhone the "Jesus phone", but the applications it offered were Safari-based web apps — a nicer way of saying a few bookmarks added to the home screen.

Apple board member (and later chairman) Arthur Levinson and Apple's head of marketing, Phil Schiller, tried to talk Jobs round more than a dozen times.

Outside voices were just as eager. Before the first iPhone's launch event had even ended, software developers were applying to build apps for it, and Silicon Valley venture capital pioneer KPCB set up a fund to invest in iPhone developers before the App Store even existed.

Pressure from inside and outside the company finally changed Jobs's mind, and the App Store arrived in 2008.

Google's situation was the reverse. By plan, its app store should have come earlier. In Google's Building 44, more than 40 engineers had been developing the first Android phone since 2005; they had already built a BlackBerry-like Android device with a physical keyboard, originally due out at the end of 2007.

But the arrival of the iPhone forced Google to tear up and start over on the basic shape of the phone, which naturally pushed back the app store too.

Still, it was inevitable that Apple and Google would build app stores at the same time. Both were entering the new smartphone market with an operating system of their own, and controlling how people downloaded and used apps was unavoidable.

As it turned out, the app store was the most important tool each company had for monopolizing its own ecosystem, making sure no one could challenge the position of iOS or Android.

Over ten years the two stores together listed more than 5.1 million apps, and in the process remade the software industry and the definition of software itself.

The App Store Remade the Software Industry

Before Apple's and Google's app stores existed, the world's largest software companies — Microsoft, SAP, Oracle, Adobe — sold to businesses, not consumers. In fiscal 2000, Microsoft's total revenue topped $22.9 billion, of which enterprise customers contributed $20.4 billion; the games, Windows and Office it sold to individual consumers came to less than 10 percent.

Mostly this was because buying software was a nuisance and pirating it was easy. Collecting from businesses in one lump was far simpler.

Phones should have been an opening for the software industry. Microsoft, Nokia, Palm and BlackBerry all had smartphones by then, and all of them could install mobile apps. These devices stayed with the user around the clock, and could be used for more than work.

But none of these companies had a single, central channel for distributing apps. Buying and installing software usually meant plugging the phone into a computer, installing syncing software, filling in an order form on a website, then downloading, copying and pasting files by hand.

The only thing close to an app store back then belonged to the carriers. They ran some dreadful web programs (China Mobile's Baibaoxiang, for instance) that let users reach them straight from the phone and buy apps, ringtones and games against their phone bill — ringtones and games made up most of it.

In Apple's App Store, carriers had no say at all. Apple alone decided which apps came preinstalled on the iPhone and which apps the store carried.

The App Store gave users and developers a complete experience.

For users, everything came down to this: find the app in the store, tap buy, wait a while for it to download, then tap the icon on the home screen and use it. The tedious steps of buying, installing and deleting software were gone.

For developers, Apple provided simple, easy-to-use development tools and clear documentation. At the distribution stage, all a developer had to do was upload the software to Apple's servers; Apple handled everything else, payment included — it even deducted the tax for you.

By the App Store's first anniversary in 2009, the number of apps had passed 65,000. Morgan Stanley analyst Katy Huberty was already telling The New York Times: "Applications are making the smartphone a revolutionary trend, unlike anything we've seen in consumer technology in years. What Apple is doing will make it the Microsoft of the smartphone market."

Just as Gates and Microsoft turned software development from a hacker's hobby into a real industry in the 1970s, the app store of a decade ago carried the software industry onto the phone and put it in front of ordinary consumers.

In 2008 the world's ten most valuable companies were still mostly oil and finance. Microsoft was the only software or internet company in the top ten.

Today is entirely different: seven of the ten most valuable companies are software or internet companies. Besides Microsoft and the mobile-platform gatekeepers Apple and Google, the other four have their main users on phones — you could say it was smartphones and app stores that gave Amazon, Facebook, Alibaba and Tencent their scale.

Employment in software has grown with this trend. Figures from the US Department of Labor and several third-party HR firms show that after 2008 the number of people working on the internet, on data and on computer operating systems kept climbing, with average annual growth far above the all-industry average. Employment in carrier-related telecommunications, meanwhile, has fallen almost without a break. This year, employment in computer systems design and related services across the US has reached 21.14 million, 48 percent higher than a decade ago.

China shows the same pattern. The China Statistical Yearbook 2015 shows employment in information transmission, software and information technology services reaching 3.363 million in 2014, double the 2008 figure. The rise in Chinese IT salaries is more striking still. In 2008 the average annual income in the IT industry was 26,345 yuan (33,678 yuan in today's money once inflation is counted); the figure published this year has shot up to 133,150 yuan, first among all industries.

The App Store Locked In Apple's and Google's Monopolies in the Smartphone Era

The App Store and the Google Play Store let developers concentrate on building an app and submitting it; the platform handled every other step. The app store became infrastructure. The price developers paid was a 30 percent commission to Apple.

At first hardly anyone saw a problem. Carriers had often kept 70 percent for themselves, and developers still had plenty of work left to do on their own.

In 2011 App Store downloads passed 10 billion, and the following year its cumulative payouts to developers passed $4 billion. The Google Play Store had more apps and more downloads, but paid out only about a quarter as much — a gap between scale and revenue that persists to this day.

But even as the software industry boomed as never before, the app store also became a monopoly tool for Apple and Google.

And just as the two companies differ in nearly everything else, their ways of holding a monopoly differ quite a bit too.

From 2010 Apple extended its 30 percent beyond apps — to books, films, music and in-game items. Discussing that year in an email to his team how to fight off Amazon's competition in e-books, Jobs wrote: "The first step is to make all transactions go through our system, including books (and by extension newspapers and magazines)."

In the end, any virtual item sold inside an iPhone app owed Apple a 30 percent tax. Charging for app downloads at least came with a bundle of services attached. Books, films and music aren't even stored on Apple's servers, which makes the cut much harder to justify.

Jeff Bezos criticized the practice publicly. In 2011 Amazon removed the buy-book button from its iOS Kindle app.

As Apple entered the online music market and began preparing a video service of its own, its conflicts with the companies on its platform turned direct.

Spotify and Netflix, the world's largest online music and online video services, were once willing to swallow the 30 percent Apple tax. Now both call it unfair in public, and both have stopped taking payment through Apple's system.

One of them loses money year after year; the other has a profit margin in the single digits. Paying 30 percent while competing with Apple's own services is an obvious problem.

Lawsuits arguing that the practice breaks antitrust law have been running since 2011, but no ruling against Apple has come yet, because developers can in theory choose not to sell through the App Store.

The trouble is that the usual way around Apple's cut is to have users pay on a separate webpage — and the app isn't even allowed to link there directly. Once people are used to the convenience of the app store, persuading them to do that is hard. Big companies like Amazon, Spotify and Netflix can afford to try; small ones can't at all.

There is no sign of Apple giving ground. Its latest quarterly results show services revenue, driven mainly by the App Store, above $9.5 billion — 17.8 percent of the quarter's revenue, growing at more than 30 percent. The App Store long ago became Apple's most important source of revenue outside the iPhone.

The monopoly Google gets from its app store works differently. It doesn't demand 30 percent from film, music and e-book services. Its grip is on the phone makers.

Android is open source, but the full system experience also takes in a range of Google's own mobile services: the Play Store, Gmail, Google Maps, the Chrome browser and more. None of these are open source; manufacturers need Google's license and have to pay to use them.

Andy Rubin, the father of Android, tied all of it to GMS, Google Mobile Services.

A phone maker either preinstalls all ten or twenty Google services or none of them. And without GMS, many third-party apps popular outside China won't work either.

With this bundle of services, Google keeps a firm hold on app distribution — the most important gateway for traffic on an Android phone. It is also one of Google's sources of revenue.

For these services, phone makers not only give up the potential revenue from an app store of their own but also pay various licensing fees; the figures that have leaked so far cluster around $1 per device.

The result is that Google has made sure phone makers can only earn on hardware, with no share of software revenue. That is why, apart from Samsung, which survives by going upmarket, every other Android phone company with global reach is either barely alive or shut down entirely.

It is also why the liveliest smartphone brands are all in China — they can still take a share of software and services. Xiaomi's IPO prospectus puts the gross margin on its internet services and app store at 60 percent, against 8.6 percent on its phones. But Chinese companies expanding abroad have run into the same problem.

Because Google's monopoly is so direct, EU antitrust regulators hit it in July this year with a record $5 billion fine for obstructing fair competition.

The illegal conduct regulators listed included requiring Android device makers to preinstall the Google Search app and the Chrome browser as a condition of licensing the Google Play Store. The sum is roughly one quarter's profit for Google. As a way of stopping the monopoly, it plainly came too late.

The Software Industry Is Bigger Than Ever, But It Has Also Turned Into Television

The wildly varied apps on the App Store and the Google Play Store hugely expanded what a smartphone could do, and feature phones became obsolete overnight.

These apps enriched the phone enormously. But apps that look varied on the surface — WeChat Moments, Instagram, Facebook, Twitter, Weibo, YouTube, Bilibili — are really the television of a new era, what people choose in order to kill time.

And because they are designed point-to-point with the user and can be tailored to them, they hold attention better than television ever did. Television is a one-to-many broadcast that has to serve the shared tastes of a crowd; it doesn't roll out an endless run of programs picked for what you like, the way YouTube does.

That is very different from 2008.

According to App Annie, three of the ten apps global users spent the most on in 2008 (games excluded) were outright productivity tools: Documents To Go, the office app at No. 1; LogMeIn Ignition, the remote collaboration app at No. 3; and Quickoffice at No. 7. The list also held the stargazing app Star Walk and navigation apps such as Navigon and TomTom. Social and entertainment apps barely got a look in.

This year is nothing like that. All ten of the top-spending apps are either entertainment or social. Users have gone from using software to solve a specific problem to being passive consumers of video and music, killing time through one refresh of the timeline and the Moments feed after another.

In a global survey of smartphone users published in 2016, Deloitte said that phone use had long been everywhere and that people's dependence on it was still deepening. More than half of people use their phone while out with others, eating with family, shopping, or even within five minutes of getting up. A quarter say the first thing they do on waking isn't washing but checking their messages. The share of people who check their phone more than 50 times a day rose 4 percent year over year, to 23 percent.

The report also found that more than a quarter of people, on opening their eyes and picking up the phone, first read instant messages on WeChat, QQ and the like; browsing social networks came second, at 20 percent. What stops people installing new apps is telling too: 45 percent said their phone didn't have enough room, and 44 percent said they didn't need the app.

Aurora Mobile (Jiguang) reached similar conclusions about how phone users spend their time. In a 2017 year-end review it said the average person in China spent 4.2 hours a day on apps the previous year — nearly two and a half hours of that on social networks and half an hour on online video, followed by news, online shopping and mobile games.

The ranking of big software companies has followed the same shift in what users consume. Forbes figures show that, leaving Google aside, the five most valuable tech companies in the world in 2008 were nearly all software companies selling productivity tools or solutions:

• Microsoft ($253.15 billion)
• IBM ($157.62 billion)
• Oracle ($96.57 billion)
• SAP ($57.77 billion)
• Accenture ($26.58 billion)

This year, again setting aside Google and the trillion-dollar Apple, the other five most valuable tech companies are:

• Amazon ($976.9 billion)
• Microsoft ($877 billion)
• Facebook ($474.8 billion)
• Alibaba ($427 billion)
• Tencent ($391.4 billion)

Amazon and Alibaba live on consumption and retail, Facebook on social, Tencent on social and games; only Microsoft still makes most of its profit from productivity tools. Widen the ranking a little and Netflix, at more than $160 billion, has passed Adobe and SAP and is closing on Oracle ($190 billion).

But the phone becoming a new kind of television, with everyone a consumer, isn't entirely the app store's doing. At its fall event in 2015 Apple launched the iPad Pro on a productivity pitch, bringing in Microsoft and Adobe to prove that iOS could be used to create. It didn't last.

This year both Apple and Google began weighing the costs of unchecked entertainment, releasing new operating systems to help people limit their time on the phone. But what software is for has already been changed for good.

Key Milestones for the App Store and Google Play

July 2008

The iOS app store, the App Store, is born

October 2008

The Android app store, Android Market, is born

February 2009

Android Market adds support for paid apps in the US and the UK

October 2009

The App Store introduces in-app purchases (IAP): users can download an app first, then pay to unlock different tiers and features

2010

The App Store comes to China

2010

Android Market's support for paid apps expands to more international markets

December 2010

Google launches Google eBookstore

February 2011

The App Store begins supporting subscriptions

November 2011

Google launches Google Music

March 2012

Google Play replaces Android Market, Google Music and Google eBookstore

2016

The App Store expands support to all 25 app categories, including Games, Kids, and Health & Fitness

June 2018

Developers have earned more than $100 billion through the App Store

Graphics by Feng Xiuxia and Wang Kaiman

Cover image/Visualhunt