I am having a hard time remembering the last product I purchased at a Circuit City, whereas I remember fondly the last two iMacs I purchased at CompUSA. Proactive International has handled many cross platform products over the years, which means we’ve always had to have a Mac available. While local Mac specialist stores like The Mac Store were left to sell nothing but their spleen while Apple Stores had plenty of iMacs, and strangely, so did the CompUSA nearby. It is hard to remember what I purchased at Circuit City as I stopped shopping there after many, many visits in which advertised products were never available on shelves.

But I will credit Circuit City in that the few I visited over the last few years carried a reasonable selection of software titles, and not just games, Windows and a handful of utility or anti-virus programs. And for that, I will mourn the death of Circuit City as a loss of one more venue for software to reach end users. The narrowing of the software channel has had a profound impact on software innovation.

No, I’m not over dramatizing, and yes, I recognize that Circuit City probably sourced its software from Ingram or Navarre, just like everyone else (with some exceptions like Frys ). Even though Circuit City carried the same stuff as everyone else, a retail presence offers some hope for change because it offered more choices for purchase. Some developers are late to recognize what this means.

But I’ll give credit to iPhone developer wake up. iPhone developers, many of which were Mac developers and strong platform supporters of all things Apple, are becoming less enchanted by having only a single venue for selling their applications. While I was at MacWorld 2009, many iPhone developers I talked to had nothing but complaints to level about the single venue of the iPhone App Store for iPhone applications The realization only seems to be setting in over the last several months that having a single venue for sales means customers have less reason to visit your website. You are in a much better position if you already have a great Mac application and therefore can upsell your customers to your iPhone solution. But doing that, you need to already have other applications plus some knowledge of marketing and business development. Combine lack of pre-existing market presence with a narrowness of channel and what do you get?

The retail software market has been headed in that direction for some time now. To reach most retailers, you have to get your software product into a pick-and-pack distributor like Ingram Micro or Navarre; most retailers would rather pass over an order than have to order directly from a vendor. But there’s been some changes in the distribution scene which are particularly irksome to new vendors.

If you are a one product company, or you have a product which isn’t a perfect fit for retail, more often than not, Ingram or Navarre will direct you to engage an aggregate vendor. This is a company that puts your products on their pre-existing catalog with the distributors, to which you pay a (very steep for new vendors) monthly fee and a percentage of sales. This is in addition to the percentage taken by the distributor.

So getting into Circuit City hasn’t been a picnic, but there was a promise there that is no longer available.

I don’t want to talk about the technical details of the release, but as John Milton put it, to justify the way of God to men on the release format and what the business implications are for the release and the iTunes Store venue. Along with the interfaces, you get an updated version of Apple xCode. Like most developer releases, you should always expect to be running Apple tools on the newest generation of processors and the most up-to-date version of the operating system. Yes, that means as a hard core developer, you need to have a modern computer and the most modern version of the operating system – if you are a starving student on an old PPC Mac, you are out of luck. While backwards compatibility would be nice for the unmonied, at the end of the day, Apple – like any sensible company that is giving its tools away for free – needs to control its costs. Getting you to upgrade means you aren’t actually developing for free, but it does mean Apple can release tools sooner rather than later. Apple is also offering an official developer program for iPhone for $99, which if it just answers one question for your commercial product – more than pays for itself.

Why the New Version of xCode?

If your experience with cross-platform development consists of working with products like Runtime Revolution or REAL Software’s REALbasic, you’ve been mostly protected – unless you go out of your way to support native features – from historic cross platform issues such as the nuances of operating systems. On the other hand, except if you were using these products during the move from the PPC processor to x86 architecture, you didn’t really have to worry about the hardware end. Apple’s move from PPC to x86 was extremely smooth, and a real joy compared to the move from the Motorola 68000 series to PPC.

With the Apple iPhone, you don’t have a move to a huge assembly of parts in a spacious tower case, but an entirely new hardware framework that has to also include a (for its size) spacious screen and the ability to synchronize data very, very quickly.

If the hardware end fascinates you, there are plenty of tear downs available – check them out on Apple Insider and YouTube.

So first things first – at least with this release, hold Apple blameless for making you upgrade your development tools and extracting $99 – or even making you upgrade your hardware. I am sure these will more than cover Apple’s out of pocket costs but it really isn’t asking all that much. Windows developers – you are out of luck. Your development tool set is going to cost you at least the sell in cost of a Mac Mini at $599.

The Apple Walled Garden

It has been widely reported that you will follow Apple guidelines in developing your applications – or else. While this annoys many, Apple doesn’t want to get your tech support calls.

Back in the early 1990’s, I used to sell Now Utilities – a great set of utilities that patched the Mac OS. Since it patched the OS, it generated a huge number of support calls to Apple whenever a modest update to the operating system was released. Apple knows the pain it is avoiding here, and does not want its technical support center getting called about your applications.

Say all you want about preserving user experience – this is a real cost issue.

The iPhone and iTunes Monopoly

If you want to sell your iPhone apps, you will do so through the iTunes store – and Apple’s taking a 30% cut.

That certainly does monopolize how you sell your application – but these types of constraints are nothing new if you have been in the game or console industry for more than just a few years. Remember the Super Nintendo? Back then, you had to buy your cartridges from Nintendo, and you only got them if you could pass Nintendo’s rigorous quality standards – and morality standards for specific target markets. While life became somewhat easier after the release of the original Playstation, instead of paying for both the media and a royalty on game runtimes, you only had to pay the royalties. This is really nothing new. If you ship games on most platforms, you are paying the console game maker – Nintendo, Microsoft and Sony – just for the right to develop and deploy those games. This is how they get by with selling the consoles so cheaply compared to their cost.

You also do not need to look any farther than Microsoft for a parallel system in deployment of XNA based games through xBox Live. Microsoft also just announced at Game Developer Conference that you’d be able to develop Zune games using the same methods.

Spurious Comparisons

The 30% that Apple is asking you for – is that a lot? A small number of shareware and traditional developers have sent me their praises and complaints.

For those who have saddled themselves with expensive online processing systems to make their small business more convenient to run, this seems like an excellent deal. It really isn’t a good comparison. Most expensive online processing systems are just that. They add convenience, but they don’t add any value in improving your sales in a strategic way. You could say that iTunes Store does give you strategic value – because its the only place you will buy apps, and not being there means you have no business on the iPhone using the SDK. You should say that Apple is doing you a favor by ensuring that you are forced to carefully reconsider if your solution could be delivered as a web application.

For those who use business systems that pare merchant costs down to below 5%, it may seem positively tyrannical. If you fall into this group, chances are you are not already selling through traditional resellers.

Traditional software resellers do not give you anything for free when it comes to marketing, and you are giving them somewhere between 20-40% of your list price. Just based on margins – the iTunes Store is a good deal – except for one thing: it is effectively your exclusive reseller. This is a huge upside to Apple, because in order for you to market your product, you are effectively marketing the iTunes Store – all roads lead to iTunes Store. The downside is that you are at the mercy of the choices that Apple makes – which iTunes Store your product can appear in (limiting access to specific locales) and limiting how your product is presented at the point-of-purchase.

From a strategic perspective, the iTunes Store monopoly shouldn’t make you happy. You aren’t gaining anything by being in there, except that its the only game in town and not being there means you aren’t in the market at all. That being said, this could also be a non issue for you if you can segment out your iPhone application business from the rest of your business, and that segmentation doesn’t bring with it additional disadvantages. Ill save the details on this, including some work-arounds, for a future discussion.

Deal or No Deal

So is this a good deal or bad deal for developers? While the answer is far more complex than a simple yes or no – Ill still give it a shot. Deal! If you are already developing on the Mac and you can carefully segment out your iPhone application from the rest of your business strategy, there isn’t a big downside to this. Your tool cost is low – not free – but low. And since the exclusivity doesn’t impact your strategy with proper segmentation, the 30% cut Apple is asking for is entirely reasonable.

Two of them come to mind with my own experience: Palm and Netscape. Ill share first my Palm story. When the first generation of Palm Pilots were launched, I was busy selling Now Up to Date and Contact in Japan (my NDAs with Now are long dead). At that time, a lot of extremely powerful technologies were being developed at Now Software and in cooperation with powerful friends. Now had a compact HTML prototype that could render an interactive page – to a Pilot. The theory was that (and get this – a year before the first Palm-powered phone ever shipped) companies could interactively invite individuals to meetings, and that the system would assist you in finding mutually free times to hold meetings – all remotely. We had two engineers working within the Palm facilities even.

At that same time, Now had a good foothold in Japan for a number of reasons – the first was teaming with a company under the auspices of Marubeni Corporation – one of the top five shosha trading companies in Japan. The second was a small software company in Japan that linked Now Up to Date and Contact with the Sharp Zaurus – the first really powerful PDA. This was backed by the very large consumer electronics company – NEC.

Given our close partnership with Palm, I contacted the then newly minted international sales manager for Palm, and offered to facilitate a relationship with this technology partner (and by extension, NEC). It didn’t take much to foresee that Sharp would launch a low priced competitor as soon as possible to counter Palm.

And get this: Now Software was even reselling Palm Pilots and had negotiated to become the new Mac OS desktop for future Palm Pilots – since the desktop for the Mac was simply terrible.

Palm’s international sales manager was positively affronted by the offer – I would even say insulting – and assured me that Palm would enter the Japanese market very, very soon. He gave me the impression that there was no real strategy for the market.

A year later – no localized Palm Pilot in the Japanese channel, and a large collection of a newly muscled Sharp Wizard organizers and more smartly priced Zaurus’ were on the market.

Leegin v PSKS, the US Supreme Court case No. 06-480 involved a lawsuit of Texas based boutique owners (retailers) Phil and Kay Smith vs a California based Leegin Creative Leather Products company. The Smiths sued Creative Leather Products after Creative Leather Products cut off the supply of their products to the boutique retailer because of discounting the Smiths applied to the Creative Leather Product’s Brighton shoes and accessories. This was a case on appeal after the Smiths had already won $3.6 million.

In the United States, a 1911 precident setting case made it illegal to set prices. Although numerous experts have commented that manufacturers have so little clout in retail to make a difference – those cited as exceptions are both in the computer industry: Apple and Microsoft.

But really, price controls have been a matter of fact for some time now, through the use of high manufacturer’s pricing, rebates, abuse of Market Development Funds (AKA “MDFs”), restrictive measures on use of logos and trade dress…and the list goes on.

Manufacturers have a long list of reasons why they would want to maintain high prices in the channel, but one that is particularly frightening to retailers is the reallocation of relationships – moving the customer relationship from the reseller to the manufacturer. Computer software, and to a lesser extent, computer hardware, have been rapidly moving in that direction for some time, beginning with End User License Agreements that establish a direct relation with the vendor – as a result of the initial customer sale by the reseller. Much computer software is purchasable online and can be downloaded immediately from the software vendor. Because many of the barriers to direct purchase have been removed, most software vendors are in competition with their own channel partners for the first sale; remove deep discounting, and its more likely that the first sale can become a direct sale.

Apple and Sony both have significant, direct retail presences that are built around their premium brands- it isn’t just a matter of perception, these companies are direct-to-customer, face to face resellers. Why would anyone enable a competitor to compete on price?

Sony in the Channel

ShinyLittle Gadgets pointed out that you can find the same product through multiple retail venues for Sony products that are healthily discounted off of the SonyStyle price. Sony, like most other manufacturers put broad categories of products into the channel, and each product-to-channel can have variable terms and availability (product, venue, venue-by-country, etc). The most flexible terms are going to be on product skus that they are willing to strategically sacrifice in the non-SonyStyle channel. Although SonyStyle and the SonyStyle stores are comparable to Apple and the Apple Stores in their consumer orientation, Sony has a far more complex channel mix that requires greater channel flexibility, especially in the laptop market, which includes both consumer oriented products as well as business products – each of which have their own channels. Sony has to continue to sacrifice more pawns in the channel as a result and are happy to do so, while they remain dependent on non SonyStyle retail for serving the consumer market.

Although software consumes content, the businesses are fundamentally different. Software is all about highly productive process – and content is the fruit of that process. The intellectual property issues are entirely different and at times, conflicting- the hottest point of conflict: digital rights management and the motion picture industry. Software enables you to display, modify and expand your enjoyment of the content offered by the motion picture industry.

At the same time, as IP holders, the motion picture industry wants to maximize every opportunity to get more money for more uses of the same IP with as little additional work as possible and they are getting more and more clever about it. Look at the endless re-releases of movies – plain initial releases, director’s release, extended release, ultimate release. In each case, a little more content is added to the bill of materials (aka “BOMs”) of the new release, and under new skus. In other words, they want to repurpose the content yet again to create new products that by being unique, you could not possibly get the idea that you already licensed them.

The moral of this story is that, if you are a software vendor and want to license a popular culture character or clever preexisting piece of music, the IP owner will likely present you with a detailed license agreement that puts limits on your use of the character or music you are not accustomed to in the software business. This isn’t insanity – its to be expected.