The iPhone as a Driver of Payments Innovation

The iPhone provides a potent illustration of the invisible engines/catalyst business model. By the end of 2009 there were more than 100,000 applications available for the iPhone. These applications have been downloaded more than 3 billion times since Apple opened its iPhone store in July 2008. Apple’s success has shaken up the mobile phone industry in many countries around the world. It has unleashed tens of thousands of entrepreneurs and created a multi-billion dollar application industry for mobile devices. Here is how an invisible engine helped make this.

Inside the iPhone there is a computer chip on which is stored the software code that does all the magic that has been behind the success of this smart phone. That software code is usually called the operating system for the iPhone. Apple could have decided to keep that code entirely to itself and focus on making the iPhone a self-contained device that only did things that Apple wanted it to do. Instead, in a smart move, it decided to make that operating system a software platform that could support third-party applications. That meant it had to create APIs which would enable outsiders to link into the iPhone’s operating system. These APIs give developers access to blocks of code that manipulate various aspects of the iPhone. Apple then provided a “software developer kit” (SDK) to help programmers develop applications using the iPhone’s APIs and put together a web site to provide other resources for developers.

An important set of business dynamics starts when such an operating system is opened up and thereby becomes a software platform that can support developers. Apple initially provided more than enough applications and features on the iPhone to persuade many people to get one. By opening up its operating system it then started a virtuous circle. Entrepreneurs and hobbyists saw the opportunity to write interesting applications that could use the features of the iPhone, including its large touch screen and connectivity. The iPhone users soon found that they could download applications that made their phones even more useful than they were when they first bought them. More people started buying iPhones because of the increasingly valuable applications. As the number of iPhone users increased, developers had even more incentives to write applications.

Apple has not taken this process for granted. Like most other successful platforms it has stoked the fires. It developed a marketplace–an online shopping mall–to help developers make their applications available to iPhone users and earn revenues from them. Apple is responsible for collecting money from iPhone users and then gives the developers about 70% share of the revenue. Users have benefitted from having effectively a single location to search for applications. Developers have benefited because Apple has reduced the transactions costs of selling and has assembled an audience of users.

Apple has obviously made enormous profits and seen the market value of the firm increase because of the success of the iPhone and its application store. iPhone users have done very well also as a result of the tens of thousands of applications they can choose from, some of which enable them to do things that were not possible before. New markets have opened for entrepreneurs that use the iPhone, and some of them are earning significant profits or obtaining fame. By bringing developers and users together the iPhone has served as a catalyst which has created value — and profit — out of thin air. Others have followed suit. The most significant follower is Google, which has introduced the Android software platform for mobile phones, has stimulated hardware makers to introduce phones using this platform, and has worked hard at persuading developers to write applications for its store.

Apple’s experience with the iPhone shows the power of the invisible engine model. As we will see software platforms can drive payments innovation and revolutionize the payments business.

For David S. Evans bio, go here.

Next post: The New Age of Invisible Engines – How Software Platforms Will Drive Growth in the Next Decade


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