Why Apple Really Wanted iBooks – An Alternate Theory (And Why Everyone is Wrong)

6860486028_b2acbb1201[1]If you've been following the ebook news this past week then  you've probably read about Apple, iBooks, and how Apple wanted to make a lot of money selling ebooks.

That's a very pretty idea, and it's backed up by testimony, Judge Cote's ruling, and pretty much every blog post on this topic. Here's Slate, just to give one example:

The iBookstore was Apple’s effort to do to Amazon what it had so long done to the rest of the tech industry: Beat it over the head with a combination of better software, hardware, and content. With the iPad, Apple hoped to create a device that would make Amazon’s Kindle obsolete, and give it the same dominance over books that the iPod had given it over music.

Unfortunately that belief is not supported by Apple's financial reports. In fact, Apple's quarterly reports reveal that Apple is making hardly any money from content sales. Instead Apple is making most of their money from iPhone and iPad sales (Example: Q4 2012).

Let me lay out an alternate theory for why Apple launched iBooks.

IMO iBooks was never about the content for its own sake; it was always about the hardware that the content was sold on. I have been saying that for some time now (most recently in late May 2013) but until today I had not backed up my statements with actual data (see above link).

I believe that the initial launch of the iBookstore was merely a stepping stone towards the launch of iBooks 2.0, Apple's digital textbook platform which launched in January 2012. And that launch was not about content either; I believe it was part of Apple's plan to get more iPads into classrooms.

This was what Apple was working towards with the launch of iBooks:

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I know this is contrary to what everyone is saying (including Apple execs), but if you look at where Apple is actually making money then you'll see why my theory makes more sense than the idea that Apple was selling content for the sake of content.

BTW, if Apple is in content for its own sake then they sure are passing up opportunities to sell it. There is no iBooks app for Android or Windows, and it took Apple over 3 years to announce a version of iBooks for OSX (due out until later this year).

In Q4 2012, Apple made $17.1 billion on the iPhone, $7.5 billion on the iPad, and a mere $2.3 billion on "sales from the iTunes Store, App Store and iBookstore in addition to sales of iPod services and Apple-branded and third-party iPod accessories". And if you click that link you'll also see data from Q3 2012 and Q4 2011, both of which also show that Apple was making more money from hardware than from content.

Unfortunately for me Apple doesn't offer more specific data than that, so I don't really know how much Apple is making from content. But I don't think it matters.

In Q4 2012 Apple made $24.6 billion off the iPad and iPhone and only $2.3 billion off the content consumed on those devices. Do you really think Apple gives a toss about the content for its own sake?

I don't. Content was merely a means to an end, not Apple's goal.

That quarterly report shows us a trend that has been growing since at least Q4 2009. That was the quarter that Apple saw iPhone revenues nearly triple that of Q4 2008, while revenue from content sales had increased by a decent 25% YoY.

I'm sorry, but if Apple is in content for its own sake then their efforts have been an embarrassing failure. On the other hand, if their goal was to use content to support hardware sales then Apple has been quite successful, making them one of the richest tech companies in the world.

--

I said earlier in the post that iBooks was a precursor to iBooks 2.0, and that later launch was part of Apple's long term plan to get more iPads into classrooms.

From what I can tell that plan seems to be working. There are numerous huge iPad programs being launched all over the US. For example, in May 2012 San Diego announced plans to switch their 1:1 program to support 27,000 iPads.

But as impressive as that figure may be it is just the tip of the iceberg. Apple announced in February 2013 that they had 8 million iPads in schools.

Tell me what Apple valued more, the sale of a $500 iPad or the sale of the $100 worth of content on that iPad (or rather the $30 Apple earned from the content)?

I'd say it is the latter, but you don't have to take my word for it. Instead you can take Steve Jobs at his own word, as quoted in the Isaacson biography:

In fact Jobs had his sights set on textbooks as the next business he wanted to transform. He believed it was an $8 billion a year industry ripe for digital destruction. He was also struck by the fact that many schools, for security reasons, don’t have lockers, so kids have to lug a heavy backpack around. “The iPad would solve that,” he said. His idea was to hire great textbook writers to create digital versions, and make them a feature of the iPad. In addition, he held meetings with the major publishers, such as Pearson Education, about partnering with Apple. “The process by which states certify textbooks is corrupt,” he said. “But if we can make the textbooks free, and they come with the iPad, then they don’t have to be certified. The crappy economy at the state level will last for a decade, and we can give them an opportunity to circumvent that whole process and save money.”

I could go on and offer more evidence, including details like the limited selection in iBooks at launch, but I don't think that is necessary.

I think the financial statements, even though they lack specific details, give us a good idea what Apple's goals were. It was always about the hardware.

images by flickingerbrad, blakespot

25 thoughts on “Why Apple Really Wanted iBooks – An Alternate Theory (And Why Everyone is Wrong)

  1. You’re playing blackjack and you came close but no cigar.
    Apple does want to sell books and compete with Amazon, they just haven’t done a good job so far. I believe iBooks coming to the Mac is a signal to a changing strategy.
    Kindle sucks and so does pdf. But so does ibooks author and Apple’s proprietary platform.
    And Apple know this and is going to do something about it.

    1. “Apple does want to sell books and compete with Amazon”

      Your claim is contradicted by Apple’s actions over the past 4 years. Where are the iBooks apps? Also, if Apple wanted to sell content then why did they launch iBooks with such a pathetic catalog? Why sign only 5 publishers and not everyone?

      1. As for the apps, let’s remember that Apple are not generally ones to put their apps on other platforms. But as for the rest … I agree.

        The amazing thing is seeing recently Apple having 15% ebook market share. If they can grab 15% with THIS showing, imagine if they actually TRIED or acted like they cared?

        Personally I have not bought a single iBook – and I have used iPad since day 1, prefer my Mac to my PC, and recently switched from Android to iPhone. And I STILL am totally engaged with Amazon ecosystem.

        1. I agree completely that was only after education. I do have some erotica in there, but I don’t really care if they take it or not. However, I also have my Asian lit stuff in Apple, and sales of those fluctuate as wildly as print does. People are teaching off Apple’s catalog.

  2. Remember when we were all speculating about the price of the iPad Mini? I thought Apple might keep it lowish as a way to encourage content sales via iTunes, iBooks, etc. when the actual price was revealed, I took it as a signal that Apple doesn’t actually care very much about competing for a share of the content market.

    1. Apple is in the process of lowering all of its prices. I expect this will be applied to IOS devices during the upcoming upgrade.
      It is true Apple missed a beat, but it maintained margins which cut into market for some devices/markets. They’ve had some time to make adjustments so let’s wait and see.

  3. Nate: Nail on the head.

    When you get right down to it, Apple has always been a hardware company. Whenever they sell content, it’s because they sell the content in ways that make their hardware more attractive. Just look at the iTunes Music Store. Whole point of the thing was to sell iPods. That’s why they used a musical format no other music player hardware did, and DRM-locked it to boot. By the time they unlocked the music a few years later, the iPod had basically already won the mp3 player market.

    1. I don’t agree. I’ve used Apple since 1986. Apple is about the experience and the experience includes hardware and software (among other things).
      If they don’t deliver the experience (safe javacript in epub3 for example LOL) they don’t get the extra margins in the price.

    2. Actually Chris the DRM was a concession to music labels. Jobs didn’t want DRM, and kept trying to get it gone – but the only way that would happen was with price. Suddenly labels started giving DRM-free to others to pry market share (and therefore power) from Apple … and Apple gave on price.

      I also agree with the hardware angle – but expand it to the ‘experience’. That is why they want to deliver the hardware, OS and core apps. But those core apps are the ones that ensure more sales of hardware.

  4. I am going out on a limb and predicting Apple has big plans for ebooks. They screwed up the vision thing so far, but losing the case is a big slap on the face. My guess they have a plan b ready to roll and it’s going to be in the direction of standards and away from proprietary. Proprietary just meant that Apple was playing the game with Amazon while Amazon is bigger (at the moment) but also obsolete (format).

  5. I don’t doubt that Apple cares more about iPhone and iPad than about Macs and content.
    Money talks.
    And they do care about the education hardware market because they used to own it outright (albeit in the Apple II era) and used to make good money there until Dell and te internet evicted them.
    But you don’t need to sell 50 Shades or Hunger Games to sell tablets to schools. (Angry Birds helps, though.)

    The reason Apple is in ebooks is a lot simpler:
    Apple saw that eople (B&N, Kobo, and most especially, Amazon) were making money off *their* customers and they weren’t getting a cut.
    Intolerable!
    Apple *owns* that market.
    They are entitled to their vig!
    So, they sucked in the BPHs and cooked up their simple scheme to bootstrap their ebookstore.
    When it was clear the going was slow, they got a bit more blatant and forbid in-app content sales and even mentioning competing ebook vendors. That tilted the playing field enough for them to get some traction.

    So yes, Apple doesn’t care as much about content as about hardware and they didn’t care much about in-app sales… until they realized the “leeches” were “mooching” hundreds of millions in revenue that rightly belonged to Apple. No way was that going to be tolerated.
    Even if the drain is tiny by Apple standards, “a billion here and a billion there and pretty soon you’re talking *real* money”.
    Plus, it’s the principle of the thing.

  6. I think this post makes a lot of sense. I don’t think Apple plans to back off from selling content, but it’s more about have a presence than being intent on dominating the ebook market, because having iBooks is an incentive to buy an iPad. As a corollary to your evidence, I would point to the fact that iBooks does not have a self-publishing platform similar to KDP or Nook Press, even though self-published books have proven to make money, at least when done with total automation and enough volume to justify the investment. iBooks does sell self-published books via Smashwords, but they don’t have any relationships with authors.

      1. No, you’re both wrong.

        Apple has now, and has had for several years, a self-publishing platform. I’m one of those authors whom you say that Apple has no relationship with.

        They don’t make it quite as easy to get a book out there as Amazon does—Apple expects you to be, and act, like a truly professional writer—but they give you absolutely wonderful tools to use to make your books. The formatting help that they offer is unequaled.

        I even use Apple programs and formatting code to create my Kindle books.

        1. Correct me if I am wrong but doesn’t Apple require you to upload from a Mac? That is hardly comparable to the self-pub programs offered by Apple’s competition, which only require a computer with a web browser.

          We might be slightly wrong on our facts but the point remains the same. If Apple really wanted to sell ebooks they would lower the bar.

          1. Yes, you have to upload from a Mac, but you and Carmen Webster Buxton stated flatly that Apple did not have any sort of self-publishing platform, and that the only way for a self-publisher to get into the iBookstore was through Smashwords. That is categorically untrue and no amount of Apple bashing on the part of either of you will make it true.

            And I didn’t state that the iBookstore was comparable to anything. It’s definitely more difficult to get in there, both technically and business wise… but it’s quite do-able. I’ve done it twice (one of them a fixed-layout picture book enhanced with audio), plenty of other self-publishers have done it, and I will be doing it again soon.

            All self-publishing platforms have requirements that have to be met before an author can get his work up there. Apple’s are more restrictive than others, that’s all. That doesn’t make the task impossible, which is what you implied.

        2. Have to agree with Peter here. First of all, to claim that Apple doesn’t care about content because it cares about hardware is a false dichotomy. I sat there reading this post thinking, “Well, DUH! Apple is and always has been a hardware company (and the best one, IMHO).” But it has always dabbled in related markets such as accessories and software.

          One thing Apple knows about itself is that it’s a pioneer in hardware, and not so much in the software industry (and eBooks ARE software). It’s not the first time Apple has hung back to watch what others are doing and what’s working (and not) before doing some huge launch of their own. One thing Jobs did in bringing Apple back from the brink was to remind Apple of its core competencies, and admonish those who were leading segments of the company too far afield.

          My guess is that Apple does have some structure or process in the works that will once again amaze us all with its sheer brilliance and elegant simplicity. I believe it’s only ever put out the iBook platform as a reminder to publishers that it’s a player and it’s still here and watching what’s going on. But even that half-measure is a truly remarkable technology, if you’ve ever actually bothered to check it out in any depth.

          It has some amazing functionality I haven’t seen offered by anyone else, but as Peter says, to use it one must be serious about it as a business, which is to say one must be producing top-of-the-line content to populate it with. In that way, Apple is helping to create a new quality gateway that is rapidly going away with the shrinking in relevance and importance of traditional publishers. As both a traditionally published author and an independent publisher myself, I appreciate this much-needed function in a marketplace crowded with so much dreck.

          And, like Peter, I also use Apple programs and code to format our Kindle books. I think this blog post has some good points, but the main conceit is simply evidence of not looking at the entire picture of the rapidly evolving publishing market.

          1. I tried to sign up for Apple direct publishing, but stopped after I fell on the floor laughing when I realized that apple didn’t even have a non-Apple way to upload content.

            Apple just didn’t want to deal with indie publishers. It’s as simple as that. Thank goodness Smashwords and Lulu made agreements to distribute ebooks through itunes.

            Nate, I think your analysis is very clever and accurate. Apple dominated the educational market in the late 90s and very early 2000s. Then, commodity PCs and laptops chipped away at their educational market share. I talked to a senior IT manager at a school district a while back; she said the school district ditched their Macs long ago for price reasons. (OF course, MS had been aggressively courting the education market during that time as well).

            Much as I complain about Amazon, they were adept at meeting the needs of smaller publishers and indie writers. Apple didn’t even bother. They were more than happy to work with big middlemen. The problem is, why bother taking advantage of epub 3 functionality for ibooks when smashwords wasn’t validating your epub3 submissions?

            How ironic that Apple was well-positioned to take advantage of apps (which were really multimedia ebooks) and yet they get dinged for funny business in ebook publishing. If they just hosting and selling apps, they would still have done well.

          2. Robert Nagle said: “Apple just didn’t want to deal with indie publishers. It’s as simple as that.… They were more than happy to work with big middlemen.”

            On the TV news they’re called “sound bites.” Short, pithy pieces of bull-… er, nonsense that sound clever but are often backed up by nothing of real substance.

            Despite Mr. Nagle’s assertions, “it” is not quite that simple. I am not a “big middleman.” I am one man. I do everything in the process of publishing my books. I am an “indie publisher” in the truest sense of the phrase, and I have found it easier to distribute my work through the iBookstore than it is to go through Smashwords.

            It seems, after all is said and done, that the people who most denigrate the iBookstore and how it operates are the ones who don’t have or use Apple computers, and who just don’t like Apple, period.

            That’s fine. You can dislike any company that you choose, and say anything that you want about it. Just don’t tell blatant lies to try to make your point or sound more knowledgable than you are.

  7. One thing to note, everyone keeps tossing around proprietary formats, the only thing proprietary is iBooks format, the ePub format is open and can be used everywhere else. As long as they keep it drm free, drm as a whole just needs to go away, serves no real purpose, can be hacked, just not worth it anymore. More proprietary format is .mobi from amazon. Not starting a back and forth for apple and amazon, just stating the fact. Yes, kindle eBooks can be read on ipad or other devices, but you have to have a kindle app. Whereas epub can be read on pretty much everything, including a kindle, although they make it a pain in the butt to do it.

  8. It was always about the hardware? Could that be more obviously true? Worth writing an article? And who didn’t know this?

    1. The judge and all the many bloggers who wrote about Apple’s ambitions in the ebook market didn’t know this.

      You might think this is obvious but it is contrary to the testimony and the ruling. It goes against the accepted truth, and that made it worth a post.

  9. Thanks Nate, this was an insightful post. What made me start thinking that Apple didn’t care about content was when they really didn’t make the iBookstore even remotely interesting to those of us who are “power consumers” or who are “scholarly consumers.” But what they got right was the hardware for those of us who are scholarly consumers, which Amazon/Kindle completely missed. Now that academic depts are pushing faculty to obtain an eReader because libraries are dropping print subscriptions to journals so fast it would make your head spin, the iPad is far outstripping the Kindle in sales because of its versatility. And you don’t capture the textbook market until you have captured the scholar’s market, which is what the iPad is doing. If the professors are using iPads and thinking about what is possible with such a device then they are going to request that textbook publishers follow suit. As this happens more and more the iPad is going to make the Kindle look like a device for genre readers only. But not a device that any of us in the scholarly world would even think of buying. My two cents, R

  10. Personally, the thought of Apple jumping up in the eBook market scares the poo out of me. I don’t want to pay the premiums they ask, I find their pricing models unfair for publishers, developers, and authors, and I don’t trust them to have the consumers’ best interests at heart.

    Unless they change the way they do business, I find the fact that they are selling like crazy in classrooms kind of scary, to be honest. Their digital text books are more expensive than most printed text books, and that is not at all including the cost of purchasing the iPads to support those text books. Schools can’t afford Apple, and if I were a parent at one of the ones spending money on Apple anyway, I’d be quite angry.

    Now, if apple wants to lower prices to schools and offer reasonable bulk discounts on textbooks, I would be fine with it.

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