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My idle thoughts on tech startups

The Difference Between Apple & Facebook

Lee Hower
June 5, 2012 · 4  min.

Reading Time: 4 minutes

Apple and Facebook are both platforms, in the sense that their software and user networks are utilized by countless software developers to build their own businesses.  In 2011 Facebook paid out $1.4 billion to developers and Apple paid out something like $2B or so.  Outside of gaming, there haven’t been any big new businesses (what we’d refer to as ISVs for past platform eras) for these two platforms yet.  But Facebook has produced Zynga and Apple has fostered Rovio and others, so presumably there will be more big businesses built on top of these two platforms and possibly beyond gaming & entertainment.

Both companies generate direct revenue from their platform in the form of a revenue share / platform tax (typically 30%) on software and digital goods sold through the respective platforms.  Facebook generated a little less than $600M in direct revenue from its “platform” in 2011 and we can infer Apple generated something like $800M – $1B (see note 1).  Facebook’s direct platform revenue accounted for about 15% of the company’s overall sales whereas Apple’s was less than 1%.  Of course both companies use their platform to increase user lock-in which indirectly helps their core revenue streams of advertising (in Facebook’s case) and hardware sales (for Apple).

At the end of the day, Apple isn’t really a software platform company.  To be fair Apple designs products in a holistic fashion… iStuff is remarkable not just for the physical product design but for the software user interface.  But essentially all of their revenue and profits come from selling high margin devices (gross margins >40% which is incredible for a hardware company).  Their software platform, and for that matter their digital content business in iTunes, exist solely to make Apple devices more attractive to consumers.  We don’t know the precise figure but it’s safe to say that the subsidies Apple receives from telecom carriers alone (separate from the purchase price borne by end consumers) are many times larger than their software platform revenue.  Apple generated nearly $130B in revenue in 2011.  Any reasonable chance to double that revenue in the next couple years will surely come from selling more iPads and iPhones as well as potentially entering new hardware categories like TVs.  Even if they increase software platform revenue by 5-10x, it’ll still be meaningless to the company’s overall financials.

What about Facebook?  Facebook’s platform revenue is still a small minority of their overall business, but it’s a lot more meaningful to them than Apple’s.  As they seek to grow from being a ~$4B revenue company to a $10B+ business, odds are that revenue growth will come mainly from new forms of advertising rather than direct platform revenue.  But the tie between Facebook’s ad business and platform are a lot closer than Apple’s device revenue and software platform.  FB generates a meaningful amount of consumer usage by way of third-party apps (which drives Facebook ad revenue obviously) and the platform gives FB a lot of information about what sites their users frequent, what games they play, what content they consume and share.  This data will likely be invaluable for creating new forms of digital advertising so I believe Facebook will innovate and nurture their platform a lot more than Apple may in the coming years.

FWIW, how do Apple and Facebook stack up in historical context of other widespread software platforms?  If you think about software platforms in the last 20 years a few stand out.  Microsoft has two huge ones in the Windows OS and Xbox.  Windows Mobile has been a disappointment to date but Azure (an outgrowth of the .NET framework) is growing as a force on the cloud/server side.  Sun Microsystems is no more but in the ’90s and early ’00s the Java platform was the gold standard for server-side & workstation applications.  Adobe has done it with Flash and PDF.

Proprietary OS’s like Windows are example of a software platform propelling pure software businesses.  Microsoft makes money not only from every additional Windows license sold (see note 2) but the OS platform then directly propels other software products like MS Office on the desktop and Exchange, Sharepoint, and others on the server side.  Adobe is analogous… they give away software for consuming Flash and PDF content but as a result they have big software businesses selling the tools used to create this content (Creative Suite, Acrobat, etc).  By contrast game consoles like Xbox and Playstation and others before it are examples of a software platform making a low/zero margin hardware business profitable.

Apple’s iOS App platform is most similar to Sun with Java, i.e. using a low/zero margin software business to propel a high-margin hardware business.  Technically speaking Sun “sold” software in addition to hardware, but generally speaking software products like Solaris were bundled with Sparc stations, disk arrays, etc and Sun reported all of this revenue as “products” or “systems” rather than discretely breaking out software and hardware sales.  In fact Sun’s profit margins were nearly comparable to Apple’s today (nearly 40% for Sun, a little over that for Apple) and at it’s peak Sun was a ~$20B revenue company.

But we arguably have never seen a true software platform which drives a core advertising business, in the way Facebook does.  In some senses all bets are off in terms of how Facebook’s platform will drive their core business.  But my bet is that they’ll find some interesting new ways to indirectly drive their core ad business by virtue of the platform and not just their own product.

Notes:
  1. This is just the estimated revenue from iPhone / iPad App Store which Apple reports lumped in with iTunes music sales.  The whole category was about $6B in revenue in FY2011 but the vast majority of that was music
  2. 75%+ of all Windows licenses are bought by OEMs to install on new computers, not end consumers
 

Lee Hower
Partner
Lee is a co-founder and Partner at NextView Ventures. He has spent his entire career as an entrepreneur and investor in early-stage software and internet startups.