Monday, March 17, 2008

The Startup Scene

iPhones and App Stores: Steve Jobs does it again

By Andrew Updegrove

In my last column, I predicted that "smartphone" software development would be one of this year's hot areas of opportunity. These devices add functions like web browsing, games and e-mail to the usual telephone and camera formula while only slightly increasing the size of the device. And, because they're mobile, they can also offer interesting location-based services that will tempt customers to upgrade what almost everyone is already carrying in their pockets.

Apparently, I'm not the only one who's reading the tea leaves this way: On March 6, legendary Silicon Valley VC John Doerr announced that his firm had formed a $100 million "iFund" dedicated exclusively to underwriting independent software vendors (ISVs) that want to create applications for the Apple iPhone.

Apple Inc. co-founder Steve Jobs made a series of dramatic iPhone announcements of his own at the same time. For the business person, he revealed the availability of Microsoft Exchange, allowing iPhone users to interact with their corporate networks, and directly challenging Research in Motion Ltd.'s market-leading BlackBerry. For consumers, Jobs announced the Apps Store, which will allow iPhone users to buy a new game, service or other digital goodie as easily as they can download an iTune.

And for all of those ISVs that Doerr wants to fund, there is a low-cost ($99) developer kit that will permit anyone who wants to create a cool new iPhone app to do just that (until now, they were locked out). When they do, Apple will sell it through the Apps Store, keeping a 30 percent sales commission. An ISV can therefore put 100 percent of its effort into development, and Apple will pick up all of the costs of distribution and sales. That can provide an ISV with a better shot at success on less capital, meaning less dilution for entrepreneurs and higher returns for investors.

Unfortunately for Apple, Jobs' and Doerr's announcements may be even better news for their competitors. That's because they give credibility to the marketplace for mobile apps generally, and will therefore help prime the pump for development and investment in apps to run on all mobile platforms. And also because Jobs announced that only Apple will be permitted to sell iPhone apps.

Steve Jobs, it seems, has a tough time learning lessons the hard way, even after sacrificing a commanding lead in PCs to Microsoft Corp., Intel Corp. and the clone vendors in the early 1980s. This time around, it could be worse. The major players in the cellular supply chain are many and powerful, from telecoms to handset manufacturers to Google Inc., which leads the Android effort. Because Jobs won't license his operating system to other handset vendors, they will have to push their own alternatives (like Symbian, LiMo and Android), and likely at a lower cost. If (for example) Google's Android development platform becomes widely supported, the market for Android apps will dwarf the opportunity that the high-priced iPhone can create. ISVs (and their investors) will then face a familiar choice: develop for a hip but comparatively small market controlled by one company (Apple), or for the huge and growing global equivalent of PC clones. What would you do?

John Doerr is a heck of a lot smarter than I am, and I'm sure that the iFund will do very well, thank you, just as did Apple's early investors. But a VC fund wants to be in and out in three to five years, and the smartphone boom is just beginning. I'm a lot less sanguine about the chances of Apple becoming a major player in the long term. So if you're an ISV or investor with big ambitions, I'd train up on the iPhone, and then apply that knowledge elsewhere.

Andrew Updegrove is a partner at Boston law firm Gesmer Updegrove LLP and has been representing startups since 1979. He be reached at andrew.updegrove@gesmer.com