Tech Bound #47: Apple’s lock-in effects

6 min read

Hello and welcome to all the new subscribers and everyone’s who’s been on for a while.

I finally picked up my SEMrush column again and wrote a guide to SEO pruning. Take a look, more to come.

Man, what a week! A glance into what happened:

  • A new European copyright law that might change the internet as we know it is on the way. It still needs to go through another round of votes in January but is expected to pass. Many famous internet faces like the founder of Wikipedia Jimmy Wales and Tim Berners-Lee spoke out against it. 
    The new law could force big platforms like Facebook and Youtube to scan every content that’s uploaded for copyrighted content. It could also force Google to pay publishers who are on Google News. I remember when German publishers tried that and were promptly kicked out of Google News, just to come back whimsically asking to be let back in.
  • Google kills Inbox. It will be phased out in March, apparently because too many features were integrated into Gmail.
  • A lengthy but worthy profile of Zuckbot Mark Zuckerberg came out in The NewYorker. When you read it, pay attention to all the anecdotes about Growth and scale.
  • Information about the new Apple phones leaked just before the big keynote – through the XML sitemap! I wonder who monitors that…

Anyway, in honor of the Apple event, I want to take a Growth perspective on one strategy the company uses pretty successfully… Lock-in effects!

Apple’s lock-in effects

Apple has 18% of the smartphone market share but rakes in 87% of the profits ( No wonder the big A hit a valuation of 1 trillion USD (1,000,000,000,000 if you were wondering) in 2018 and is now the most expensive fruit in history.

Some would joke that’s because of all the dongles you need to connect your device to others. As funny as it is – and it’s funny – it’s not completely wrong. They’re part of Apple’s “lock-in effects” or “lock-in strategy”.

Lock-in effects take many shapes and forms: a 2-year phone carrier contract, file formats that work only with specific devices (like the iTunes music file format AAC), or the mentioned dongles. Those are all examples of negative lock-in strategies.

apple dongles

Neutral lock-in effects occur for example when we consider switching from Spotify to Apple Music but don’t because we’ve created so many playlists and collected so many songs in Spotify over the years. Or when we think about quitting Facebook but don’t because of all the time it took to build all these connections. They are about “Sunk Cost”: not switching because of the time, energy, and money already invested.

Positive network effects come from unique features, brand strength, and price. One example is iMessage, a simple but powerful feature, which prevents some Apple customers from switching to an Android device. Another example is an Apple Music subscription, which is free for the first 6 months when you purchase a new iPhone. Apparently, Apple is also working on a news subscription (following the purchase of Texture).

In connection to lock-in effects, we often speak about “switching cost” – how high is the price of switching a product or service? The biggest driver of switching cost is probably Apple’s eco-system. Using a MacBook is nice, but combining it with an iWatch, iPhone, and Airpods, can be really powerful #iCloud.

Lock-in strategies can be applied to all sides of the business, also to developers and vendors. Apps need to be build specifically for iOS. There’s a good reason for why Apple and Android don’t make it easier to build apps for both operating systems. The same applies to OEMs, for example. The most prominent ones for Apple are Intel and Qualcomm and both have very exclusive contracts around Apple-specific components.

Lock-in effects are engrained in Apple’s DNA because its products are “integrated”, as opposed to “modular”. You can only choose from a few different hardware components for MacBook but they work really well together. Apple products are fine-tuned. PCs are modular. You can run any operating system on them and use whatever hardware you wish. Integrated products provide more opportunities for lock-in effects.

Apple’s strategy got really aggressive when they changed the iPhone’s and MacBook’s plugs for Lightning connectors. This is where we go full-circle to dongles. They are an aggressive form of lock-in strategies. But, as frustrating as they are, people still buy Apple products. No wonder Warren Buffet says Apple products are “enormously underpriced” (Business Insider).

I have a plane that costs me a lot, maybe a million dollars a year or something of the sort. If I used the iPhone — I use an iPad a lot — if I used the iPhone like all my friends do, I would rather give up the plane.

Warren Buffet

Almost every successful company uses some sort of lock-in effect. Tesla built a powerful ecosystem with its cars, the Powerwall and solar panels. Owning one product is great, but in combination they’re fantastic. The Powerwall, however, is not compatible with every electric car. Another example is Google, which forces users to have a Google account to install Chrome and webmasters to follow certain rules and certain to rank in Google Search.

Awesome stuff you should read

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Money CNN: Meituan-Dianping IPO
Meituan-Dianping goes public to raise $4.2bn. I wrote about the company’s Growth strategy before, in Episode #23. That’s definitely a big move.

Gates Notes: Not enough people are paying attention to this economic trend
The economic principles for intangible products like software are not the same as for physical products. Especially law makers and government bodies need to adapt. Some investments don’t seem to be part of GDP estimations, for example.

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Helpful inspiration if you’re thinking about creating your own product but are stuck in finding an idea.

Recode: Amazon is stuffing its search results pages with ads
Welcome to the pay to play world. I don’t agree that this is a healthy balance to Google and FB, though, as the article states. A healthy alternative is a space with fewer ads and more organic search to promote products people like, not pay for to rank high.

Slate: The Great Facebook Crash
“The love story between Facebook and publisher is a dramatic one, with many ups and downs, and it doesn’t seem like it has a happy end. Facebook first gave publishers a taste of how much traffic they could get and then brutally drained them.
“At Slate, traffic from Facebook plummeted a staggering 87 percent, from a January 2017 peak of 28 million to less than 4 million in May 2018. It’s down more than 55 percent in 2018 alone.”

I wrote about the changes in social media and the impact on publishers back in episode #17.

Now, other channels seem to replace Facebook: “Google, Apple News, Twitter, and Flipboard are all sending more readers to Slate than they used to.”