Not so very long ago, in 2007 actually, the world of mobile phone makers was placid and predictable, typical of the 80/20 world. Five of them – Nokia, Samsung, Motorola, Sony Ericsson, and LG – had cornered 90 per cent of worldwide mobile phone profits. Yet today it’s a totally different story.
A new entrant came into the market and its product – the iPhone – changed everything. By 2015, Apple had made the market hugely larger but also grabbed 92 per cent of global profits. Four of the five former phone fat cats are now losing money.
The shorthand is that 80/20 became 90/10. Instead of the top 20 per cent of suppliers getting 80 per cent of profits, the top 10 per cent – actually just one phone maker – had 90 per cent. The whole rest of the industry is sharing crumbs from Apple’s table, with only Samsung making a fight of it.
So why did this happen?
Steve Jobs didn’t just want to sell phones to customers, the old way. Jobs wanted to connect app developers with app users. The app developers don’t need to know who the customers are or find them, because Apple already has them – all iPhone users.
Apple has a “platform” – the phone itself and its associated intellectual property. A platform can generate huge profits for the platform owner. Just look at the valuations of other platform owners such as Alphabet/Google, Amazon, Uber, Airbnb, Facebook, and Paddy Power Betfair.
The platform owner has power as well – it can decide how the platform is run and therefore entrench its position. Apple decides which app developers are allowed on the platform (no porn please, we’re American) and how the developers and users interact. After the platform is created, Apple takes a massive share of profits for doing very little.
This was the second time Jobs had hit the jackpot with a platform business. The first time was with iTunes. Recall the parlous state of the music industry in 2003. Sales were plummeting as shadowy sites such as Napster and Kazaa offered songs for free or very little. By persuading the petrified record companies and their artists to participate, the iTunes store opened with 200,000 tracks, each available for just 99 cents. A download took a minute, not the 15 for the piracy sites.
The iTunes boss, Eddy Cue, made the bold prediction that he would sell 1m songs in six months. He was wrong. It took just six days to hit that target. And Apple took 30 per cent of all recording sales – nearly all pure profit for Apple – just for owning the platform.
Why do platforms change 80/20 into 90/10 or 99/1?
Platforms create networks. Everyone – producers and customers alike – wants to be on the largest network. This is a profound, epoch-making change, which turbo-charges both industry profits and who takes them, for two reasons:
First, network markets become monopolies or duopolies. This is a winner-take-all world in which market share is hugely more concentrated.
Second, in the 90/10 or 99/1 world, the difference between the number one player and the number three downward becomes multiplied enormously. The gap becomes a gulf. The profits of number three downtrends towards zero or less. Hope of overthrowing the leader is nearly always forlorn.
The only hope is to invent a new segment that you can dominate.
But funnily enough, this has never been easier or more lucrative. Just look at what Jobs did and work out how to do that first in a new niche or market. Then you too can become a billionaire.