The irrevocable failures of centralized business models

Last year, when the FBI ordered Apple to help it break into an iPhone that belonged to a terrorist, the company denied to comply and challenged the federal government in court to avoid setting a precedent that would undermine the privacy of all its users.

18 months later, when the Chinese government ordered Apple to remove major Virtual Private Network (VPN) apps from its version of the App Store that is available in the country, it caved in without a fight.

This is not a move you’d expect from a company that professes to be dedicated to protecting customer privacy and information. VPN apps are extremely important to evade surveillance and circumvent censorship, especially in countries like China where the internet traffic strictly controlled and limited.

In case you were under the illusion that Apple’s loyalty is to consumer privacy and protection, this bit of news should serve as a wake-up call. That’s the responsibility of nonprofit organizations such as the Electronic Frontier Foundation and ACLU.

Apple’s loyalty is to its bottom line, like every other for-profit organization. As it happens, the consumer privacy pitch works well in the U.S., Apple’s largest market, where the standoff against the feds earned Tim Cook and the company much-deserved sympathy from the tech and privacy community, and helped retain customers and attract new ones.

But things are different in China, where the government would tear off Apple’s App Store without a second thought, costing the company its third largest market.

But as much as I’d want to, I’m not here to discuss the morality of Apple’s decision. I think enough has been written about that already. I want to discuss the business side of it and why Apple had no other choice than to capitulate to the unfair demand.

In this specific case, Apple was as much the victim of its own business practices as it was to the pressure exerted by the Chinese government. Since its founding, Apple has favored a strictly centralized and walled garden business model, and now it is suffering the consequences.

First, Apple’s app distribution is centralized. There are no alternatives to Apple’s App Store. That’s why a block on the App Store would severely limit the use of iOS devices. It is still possible to circumvent the ban, but many users can’t or won’t bother managing the complexities.

In contrast, there are hundreds of alternatives to Google’s Play Store. That’s why despite the fact that Play Store was blocked in China since 2011, Android users have had no problem downloading and installing apps on their phones.

Second, Apple’s device manufacturing is centralized. There are no alternatives to iPhone. True, Apple’s flagship phone is sleek, reliable, secure, fast and full of nice features. But it’s also very expensive, and many people who’d love to have one can’t afford it. A more diverse set of choices would help Apple make inroads in other marketplaces.

In comparison, there are hundreds of companies that are manufacturing Android phones, ranging from very good to utterly crappy. So consumers have plenty of choices to make (at their own peril).

Third, Apple’s market is centralized. The Americas, Europe and Greater China account for approximately 85% of Apple’s revenue. China alone has a 20% share of Apple’s income, a figure that the company simply couldn’t do without.

And fourth, Apple’s income sources are centralized. iOS devices account for 73% of Apple’s revenue. That means that the company’s success is largely bound to how many iPhones and iPads it can sell, and it can’t afford to lose the market for those devices. In contrast, a balanced income such as that of Microsoft would make it less vulnerable to the volatility that any single product or service will cause and make it more resilient against the kinds of restrictions that China is currently imposing.

To be fair, there are some advantages to the way Apple does business. Apple’s logo has been the hallmark of quality, security and reliability for many years. The App Store offers less buggy apps. iPhones fail less often than other smartphones. But the trade-offs of Apple’s crystal prison and centralized business model are weighing down on the company badly at this moment.

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