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Ever watch the movie Pirates of Silicon Valley? There's a scene late in the movie, which covers the PC industry's early days, in which the Steve Jobs character, after learning that a new Microsoft (Nasdaq: MSFT ) operating system called Windows incorporates many of the features claimed by Apple's (Nasdaq: AAPL ) Mac OS, defiantly proclaims to the Bill Gates character, "We're better than you are! We have better stuff."
To which the Gates character triumphantly responds, "You don't get it, Steve! That doesn't matter!"
It sure didn't matter in the following years, as Windows -- bugs, bloated code, and all -- achieved near-monopoly status in a booming PC industry, helping deliver incredible returns for Microsoft shareholders along the way. How ironic it is, then, that as the coming decade unfolds, the shoe might be on the other foot, with Apple's competitors in the smartphone operating system space -- Microsoft included -- finding themselves unable to stop an iPhone juggernaut that can compensate for hardware and software shortcomings by offering a far greater number of applications for its platform.
Market dominance? There's an App (Store) for that.
Although its App Store for the iPhone and iPod Touch was launched only 15 months ago, Apple now claims to offer more than 100,000 apps on it. By comparison, Google's (Nasdaq: GOOG ) Android platform, which powers Motorola's upcoming Droid phone, claims about 14,000 applications. And as of July, Research In Motion's (Nasdaq: RIMM ) BlackBerry App World had a mere 2,000 apps; while not every BlackBerry app is available on App World, this number does suggest that RIM is also well behind.
With this explosion in available iPhone apps, Apple has been able to tap into the creative talents of wireless software developers on an unprecedented scale. Google the words "best iPhone apps," and you'll find one great list after another showing the extent to which the creativity of Apple's developer base has extended the functionality of the iPhone in a way that Google, RIM, and Palm (Nasdaq: PALM ) are hard-pressed to match.
The enormous size of the iPhone's huge app base has also had the effect of driving down prices for consumers, as developers face healthy competition from competitors large and small. Having long been accustomed to seeing quality Palm OS and Windows Mobile apps go for $15-$20 or more, I can't help but be impressed at how much quality software is available on the App Store for $10 or less -- and in many cases, for free.
But maybe the biggest advantage stemming from the iPhone and App Store's popularity is that major developers are gravitating toward the platform in a big way. This group includes everyone from marquee software firms such as gaming giants Electronic Arts (Nasdaq: ERTS ) , to media/online news leaders such as ESPN and the New York Times, to coffee chains such as Dunkin' Donuts, and retailers such as Amazon.com. Developers like these are much more likely to create apps that become "must-have" items for one smartphone user or another, and they're also able to act as a promotional engine for Apple.
There's been no better advertising for Windows over the years than seeing row after row of software in a major electronics store that works only on Windows. And Apple's marketing skills notwithstanding, there may be no better advertising for the iPhone than seeing so many prominent developers promote their latest iPhone app to their customers.
Why the fight's not over
Still, Apple will need to address some major challenges before we can deem the smartphone application wars over. For starters, the App Store could become a victim of its own success. With so many available apps, and competition driving prices down, some smaller developers are now griping about how hard it is to turn a profit. It's not hard to see some of them responding by trying out their luck on competing platforms that have less competition.
Apple's ability, and willingness, to act as a gatekeeper restricting which apps are allowed on the iPhone could also give competitors an opening. Whether it's blocking Google Voice, preventing SlingPlayer TV-streaming software from running on AT&T's (NYSE: T ) network, or limiting access to third-party media players, these app restrictions are already drawing fire from smartphone enthusiasts. Apple has recently shown more willingness to allow some of these restricted applications on its App Store, most likely due to government pressure on AT&T. Still, there's more work to be done. I'm personally an active user of SlingPlayer on my Windows Mobile phone, and though the App Store's huge catalog has me leaning toward getting an iPhone as my next handset, the lack of an un-crippled version of SlingPlayer could be a deal-breaker for me.
Last but not least, Apple needs to continue spawning a cultural change in how consumers look at their cell phones. There are still plenty of smartphone users out there who have little interest in downloading and installing new software onto their devices. For these customers, the App Store's catalog isn't much of a selling point, and Research In Motion and Google might have an easier time reeling them in.
Nonetheless, with total downloads having passed 2 billion in September, the App Store's momentum looks pretty overwhelming to me at this point. Though Apple keeps App Store sales figures a secret, wireless advertising firm AdMob estimated in August that its sales are running at a $2.4 billion annual rate. With a 30% cut on App Store sales, that would translate into $720 million in revenue for Apple -- most of which would be gross profit. With downloads still growing at a staggering clip, it might not be long before Apple has another multibillion-dollar engine fueling its growth machine.
Maybe in a few years, we could have a movie scene where Google CEO Eric Schmidt promotes Android by touting the ways in which the operating system is superior to the iPhone's OS. And in which Steve Jobs happily replies, "You don't get it, Eric. That doesn't matter!"