Apple locked us in, but how long will the jail sentence last?

This is a guest post by Paul Fisher a Venture Capital investor with Advent Ventures in Europe Portfolio companies include, Qype, Adeptra and DailyMotion. Paul blogs at The Coffee Shops of Mayfair and Twitters at @paulfish.

I have watched with interest as the Apple backlash intensifies* (see below). It seems the App Store has broken the camel’s back. There is massive resonance here for both entrepreneurs and VCs.

This quote from Chris Messina is my favorite . He thinks that the Apple App Store is a “flash in the pan” because it is a proprietary platform and, hey, wait a minute, proprietary platforms are counter to consumers’ interests. That’s why Microsoft accrued haters. And why folks are starting to feel the same about Apple?

There are actually three intellectually fascinating points here:

1) Behavioral economists and entrepreneurs agree: Creating an emotionally resonant or “cool” product gets ’em hooked.

Fashion makes people purchase irrationally. It didn’t take a genius to realise that having all your MP3s in an Apple AAC format was locking you in. Irrational. But people did it. And they’re only just beginning to realise it. Hence rants against everything from the app store to itunes.

It is amusing to watch how the worm has turned. But it will not come as a surprise to behavioral economists who have been telling us for some time how to pull the punters in:

“Our choices are often affected by random initial anchors …The choices and trades we make are not necessarily going to be an accurate reflection of the real pleasure or utility we derive from those products…”

This was written by Dan Ariely, who has essentially written a manifesto for entrepreneurs to focus on “user love”. Some entrepreneurs need no warnings against academic over-analysis. For example, the team at Qype (interest declared: one of our investments) made a product that people just love.

A behavioural economist would say this was constructing a compelling “initial anchor”. Whatever the dev team was thinking, they were trying to build something cool. Sweet. Nice. Something with emotional resonance. I meet some very “business school drilled” management teams, who have performed deep analysis to the nth degree, but they’d do well to stop their SWOTs and spend time just making a product for us all to fall in love with.

2) Apple shows entrepreneurs how to build competitive advantage.

Apple has helped entrepreneurs (and VCs) understand how investing systematically in previously intangible product features such as “cool” and “sweet” makes for a better business model. (For example Spotify’s made the decision to invest in them significantly easier when they started by demoing such a beautiful app).

At a simplistic level, Apple get punters to buy their products because on the “way in” it has invested a little more in R&D to make the iphone beautiful or, invested a little more in community marketing to get cool designers blogging about the mac book air etc. On the “way out” (i.e. at Best Buy or Dixons) this allows Apple to charge twice the price.

For any entrepreneur interested in how this affects their business I would strongly recommend Joel Spolsky. In this video he Argues (proves?) that Apple is winning by making their products acheingly beautiful. Now geeks are having to grok aesthetics because this is the thing that can triple your margin. Or your exit value.

3) Is the iphone app store an interim “moment” in the mobile web or does it have longevity?

The iPhone app store isn’t so different from the Mobile Operator’s “Walled Garden” of 4 years ago, like Vodafone live!. (A defunct model if ever there was one, but don’t get me started on this industry peddling an over-branded data pipe).

So is it a little surprising that the “Walled Garden Mark II” actually looks like it’s working. Didn’t consumers already vote with their feet against these proprietary platforms?

Well economists would argue no. Carlota Perez would suggest a “walled garden” was the classic “development phase” of a market: it was bound to fail but a necessary prerequisite to the successful appstore market:

“The action of these pioneering agents blazes the trail, giving rise to increasing externalities and conditionings – including production experience and the training of consumers- that make it easier to follow suit.”

However, to continue this logic, it could be that the Apple store is also just another pioneering agent which is a means to an end, not an end in itself. Messina argues that just like the walled gardens, the app store is also an interim development phase and the future is a mobile browser that’s yet to be finished. Phew.

So what does all this economic theory mean for entrepreneurs?

If you’re building a company with mobile apps (which is pretty smart) there are few issues. I have met companies developing apps just for the app store. Nothing else. Not the mobile Web at the same time. Is this smart?

I have met small companies spending $$s on multi versioning for different smart phones. Is this a better strategy? Are you writing for Android and Apple? Are you assuming “discovery” is covered with GetJar, and the App Store, or are you investing in direct promotion ?

Or are you forgetting the mobile strategy for the app until a dominant mobile browser emerges? What’s the right strategy?

Of course no-one knows. It could take 1 year to find out, or 5. The problem for both entrepreneurs and VCs is that timing is everything. If you’ve raised money today to execute on a mobile strategy you need to go where the market is now. But what if that market goes away or moves elsewhere? Surely Apple has it sewn up for another 5 years right?

Hmmm…And this, dear reader, is the eternal question. Timing. As John Maynard Keynes said: “The market can stay irrational longer than you can stay solvent”.

Looking forward to hearing your thoughts.

* Here are some interesting links with people getting annoyed with Apple: Apple annoying iPhone developers here. Apple the New Microsoft here. App stores just a flash in the pan? here Are app stores just another walled garden? here .