The New York Times took an intelligent look at how content is selling on Apple’s App Store.  The best-selling version of David Pogue’s “iPhone: The Missing Manual” book is its $4.99 iPhone app version, not the paper book or PDF.  Saul Hansell understands the application’s success on the iPhone is because of the valuable convenience and service Apple provides rather than customers simply paying for content.

Apple has created an environment that makes buying digital goods easy and common. With an infrastructure that supports one-click purchases of songs and videos, it was easy to add applications in the same paradigm. Paying for software, especially games, is not new to Apple customers. So when you see the iPhone manual or the Frommer’s Paris guidebook, it feels natural to click. (And of course, your credit card is already on file with Apple.)

He adds that Pogue’s app “hard to use” with poorly formatted text and a lack of interactive features, but for $4.99, the book sells quite well to a captive audience.  The publisher raised the price to $9.99 and saw sales plummet 75 percent.

This is not an example of micropayments, like some would like us to believe.  As newspaper’s desperately try to convince the public content should be paid for, they forget to tell us why to pay for it, let alone give us a reason to.  Apple built a easy-to-use system that is so convenient, it’s worth a few dollars and cents.  But Apple doesn’t look to make money on it’s App store. Apple already makes a healthy profit on the iPhone itself, just like on the iPod. Any profit from songs or applications is icing on an already sweet cake. These so called micropayments supplement Apple’s massive profits – they aren’t the source.  Newspapers hoping to replicate this model will be sorely disappointed.

Another difference, Apple has no real competition.  No one else can sell or offer iPhone applications except Apple (unless you jailbreak your phone). And no other mobile phone system offers as complete a catalogue or convenient system to truly challenge the iPhone (Google’s Android is trying very, very slowly).  If and when Android or Symbian or Windows Mobile (ha) can and do challenge the iPhone, convenient service will not be worth paying so much for. It’ll be expected and the next innovation will be required.  That’s, of course, smart business – staying ahead of the competition.

Something of concern for Apple and micropayment fans is research shows iPhone users rarely use applications after 20 days.  Techdirt points out iPhone users not finding much value in the apps they download will be less likely to spend money on more, hurting the long-term viability of the store.

A paper written by Haim Mendelson from Stanford Graduate School of Business and Deishin Lee from Harvard Business School guides students and businesses on how to fight open source business models and technology.

The two professors say being first to market, improving product features, and keeping the product closed are needed to combat the open source market - the way to make money against competitors who sell their products for free.  By keeping the product closed, open source networks can’t use the product to improve their own.

It’s sad to see such misguided lessons coming from two smart people and worse, teachers in a business school.  While it’s fine for commercial companies to compete with open source initiatives, Mendelson and Lee seem to recommend commercial as superior to open source even though several business models show free can be very profitable (e.g. Linux, Mozilla, MySQL, Wordpress).  Their example of a good commercial release, Microsoft Office, ignores how Office didn’t compete with open source upon release and further ignores how Microsoft is adapting to compete now with Open Office, Google Docs, and Zoho (all are free, only Open Office is fully open source).  Microsoft has released new specifications on its format types for anyone to include in software and is considering a subscription-based model for future releases.

Mendelson and Lee’s emphasis on being first to market is always good, no matter your business model, and improving product features is likewise necessity.  The problem commercial software has and will continue to have is open source, or at least open platforms, just offer more for less. Apple’s iPhone, another example of Mendelson and Lee’s, began by refusing developers any access to the system, telling them build for the web browser. A year later developers get to build applications with harsh restrictions, sometimes issued after applications are finished being built.  Google Android is coming out, fully open source and free for phone manufactures, has already attracted sour iPhone developers and has a huge software library waiting for its clientele - the first Android phone is still three weeks away from release.

Closed systems are a dying breed. It’s a slow death.  Trade secrets will always exist and there’s nothing wrong with that. What business students and professors should recognize is the landscape is evolving. Free and open aren’t bad words, but should be embraced by the next generation of business leaders.  Encouraging more of the same closed, walled garden thinking only slows innovation (see Microsoft) while free and open are winning the market and the profits (see Google).

Just as I praise 3rd-party innovation on other mobile systems, Apple shows itself less willing to host an open environment.  A developer released a $999.99 iPhone application called “I Am Rich” that did nothing but show a red screen. Some bloggers called for Apple to takedown the program for no reason other than it was significantly over-priced.

Why remove the app? Yes it’s stupid and the eight people who bought it are weird to say the least, but if people want to spend $1,000 on a red screen, who is Apple to say they can’t? MG Siegler of Venture Beat says since the App Store isn’t completely open, Apple shouldn’t have approved it in the first place.  But why? “I Am Rich” doesn’t violate any of the rules Apple laid out: no pornography, bandwidth abuse, or threat to privacy.  The program specifically states there are no hidden features. Anyone who buys the program knows exactly what they’re getting.

By de-listing the program, Apple is expanding its control over what is allowed on the iPhone, proving if it doesn’t like your program, it can and will remove it. Apple also removed BoxOffice, a movie showtime search engine, without notice or justification. Without standard rules on what is allowed on the iPhone, developers may be scared away from getting on Apple’s bad side. Further, it scares away innovation that expands usage and value for the iPhone - no one wants to risk time and money to get banned.

Apple keeps fighting open standards for the iPhone which works now amid the hype. But competition from open systems like Google Android (if it’s ever released) and Symbian will challenge Apple’s concept of top-down control.  The reason Windows Mobile has full flash support in the Skyfire browser is thanks to 3rd-party developers given free-reign to do as they wish on a platform.  If Apple wants the iPhone to really change the mobile space, it needs to let developers do what they do best - develop.

I just joined Skyfire’s private beta and my response is wow. Skyfire crams a full desktop experience into the tiny mobile screen for Windows Mobile with impressive speed and sleek design.  This includes full Flash support, putting all of YouTube and Hulu on your phone. Even Ajax and Java heavy sites like Google Reader run smoothly.  Many options are lacking in this early version, but the browsing experience is an impressive sign of browsing to come.

Skyfire’s compatibility works better than the iPhone Safari but lacks features needed to be the best.  You can’t change your start page (though the Skyfire homepage conveniently includes your bookmarks and history). There’s no tabbing or fit-to-screen zoom like on Opera meaning I’ll keep Opera around for text heavy sites.  The touch controls take some getting used to - the iPhone still wins on easy-of-use with multi-touch zoom. Most frustrating is the free browser needs to authenticate and closes if you loose your connection.

Unfortunately, Skyfire remains in private beta with no invites, so a lot of this is just me showing off. These many frustrations prevent Skyfire from becoming my default browser, but showing off YouTube and Hulu to my iPhone wielding friends makes it a must have application.  See screenshots after the jump.

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Any web 2.0 business model must, by law, include five or more buzz words from user-generated content to API to social networking to get venture funding.  Companies are desperately trying to use social media like Facebook, Second Life, and even the iPhone to manufacture marketing and attention. The result is start-ups and established companies focusing resources because that’s where the hype is rather than where the smart business is.

Hype is the keyword here.  An already popular company like Facebook or Apple launch something new and obviously there’s hype.  But this hype is not contagious.  A former boss of mine said the reason we were developing an iPhone app before we had a mobile site was to “Get some attention when the app store launches.”

For start-ups limited in resources, jumping on the internet bandwagon is more often a waste and at best a distraction.  It’s best to focus on building your own features and worth to make sure once people find you, they want to stay.  Building applications for other platforms fragments your audience and time - what you build on Facebook needs to be rebuilt for the iPhone and rebuilt for Netvibes.

Second Life has become a prime example of hype overblowing marketing potential.  Last year, just as another company I worked for wanted to build a Second Life presence, Wired wrote about the marketing waste the virtual world had become. Coca-Cola, Reebok, IBM, Sears, and dozens more build huge islands with style and zazz, paying high-profile Second Life consultants and expecting the viral marketing to take off.  But no one visited.  The hype came from companies trying out Second Life, but no one ever posting resulting.  Since Second Life accounts are free, the 4 million users it boasts is misleading.  Only 1 million had logged on in the past 30 days and only a third of that in the past week.  Only 100,000 of those live in the U.S.  Those who do sign on spend most of their time in sex shops or gambling, not looking at marketing campaigns.

Facebook is likely to follow. Facebook itself is having trouble monetizing its massive user base, how do third parties expect to do better?  iPhone applications can be sold for money, which makes them less viral.  And working with any closed platform like Facebook or Apple puts the platform in control of your future.  Facebook suddenly blocked some of its most popular applications, Top Friends, Super Wall, and Social Me, with little notice and challenges to get back in the platforms good graces.

The opposite strategy of releasing your own API is more worth the time (if it makes sense for your product and not just a buzz word for investors) but has its own risks.  Twitter’s success and constant downtime are both due to their API.  Without the API, much of the sites usefulness wouldn’t have happened leading so many to join.  But because of the API’s popularity, the site can barely keep basic features operational.

So this is a lot of don’t.  The dos, unfortunately, are the hardest because it needs to be case-by-case.  Because there are so many platforms and APIs and doodads to try and sync up with, it’s impossible to say everyone should do this.  The key is when deciding how you want your product to integrate with the greater web world, think about your own strength and goals rather than bullet list features.  Everyone is pushing the same bullet lists.  You’ll stand out more by not.

Forbes provided some hyped linkbaiting today with an article on why Apple’s iPhone could kill, not compete with, but kill the Nintendo DS. I’m taking the bait to quash Apple’s gaming might once and for now.

Tech pundits love finding that new “killer” app to quash the incumbent which, in recent memory, always seems to be something Apple related: iPod “killer”, iPhone “killer”, and even Apple TV “killer” (do you need to kill something that isn’t even selling?).

Nintendo’s DS is the powerhouse of handheld gaming, the benefit of almost 20 years and more than half-a-dozen hardware generations. Sony launched its first handheld competitor, the PSP, barely clutching to 30 percent of the market, a credit to the system’s power and Sony’s well-established Playstation brand. Apple comes to the gaming world with no experience (except the tragic Pippin), no game studio, no retail presence or expandable memory, and most importantly, no interest in killing Nintendo.

Forbes writes its article ahead of Apple’s release of 3rd-party software include, presumably, an assortment of games. When Apple announced its developer’s kit for 3rd-parties, major game publishers Sega and EA were there to show off the first games for the platform. These high-profile releases led blogs to speculate on the iPhone’s potential as an actual handheld gaming platform.

This assumes Apple wants to be a handheld platform. The recently announced $25 for games sales Apple has other priorities. Gaming platforms have relied on low priced hardware subsidized by royalties from game sales. Sony’s PSP struggled initially at its $200 price point - how can Apple’s $400 iPhone think to fare better.

The other point against Apple’s gaming interests are its lack of actual gaming. EA’s cute flOw clone, if holding to Apple’s aforementioned price, costs $8 on the PS3. A rare $20 game on the PSP, Patapon, featured dozens of hours of gameplay. The DS offers assorted casual games like those likely to dominate on the iPhone, but also offers a varied library of epic stories and varied genres. Casual gaming is big business, yes, but hard core gaming is still bigger. The Wii sells amazingly, but software beyond Nintendo (first-party) fails to sell like games on the Xbox 360 and PS3.

Games will never sell the iPhone. The iPhone sells itself because of its variety of features and solid casual gaming will appeal to that user base in ways even the Nintendo DS can’t. The result will be different markets, not competitors.

As Gizmodo reveals, there’s this unique new band (can we really call them that?) called iBand with a creative new YouTube video featuring the original sounds of two iPhones and a Nintendo DS with Electroplankton.  I only fear when Philip Glass creates a 150-person iPhone orchestra.  The future is now people.

So all that talk about Apple beating the iPhone hackers. Well, that didn’t last long. Already a method for downgrading the new firmware has been released, showing users a way to return their iPhone to the original firmware. Now it’s not perfect since you can’t use the iPhone as a phone, but come on, one step at a time. It might be harder to get phone functions back for a while, but Wi-Fi still works as well as all the third-party apps.

Though this would all be easier if Apple just let third-party companies easily create applications for the iPhone. People are doing it for free already. Why fight something that only makes your product worth more.

Within days hackers cracked the iPhone like the glass touch screen rolled over by car tires. Apple released a new firmware that freezes hacked or modded iPhones preventing users from accessing programs or services, possibly permanently.

The mainstream press has followed the thus far short give-and-take between Apple and iPhone hackers, and this sudden firmware update looks like a powerful win for Apple. But this is only because the mainstream hasn’t seen hackers battle and beat corporate America over and over again.

Video game consoles have been fighting a back-and-forth war between hackers freeing up console firmware. The console maker than updates the firmware, often for the sole purpose of blocking the hackers. But within a few weeks, a new hacked firmware gets released. Nothing is perfect.

Apple will discover the same painful challenge. In a few weeks or less, this new iPhone firmware will be cracked and people will once again be able to customize their iPhone until the next firmware gets released.

But as Between the Lines points out, Apple’s battle with hackers might cause more bad than good:

We do know none of these hacks to unlock the iPhone would be necessary if we had carrier choice. What’s the cost differential between adding a few carriers to the iPhone and wasting time developing software to outflank hackers?

Even with an extremely successful launch for the iPhone, Apple has started seeing their power getting the better of them. The mass of attention on their products, from the media to the early adopters to the general public, means little information can hide. Most people will never know or care that Sony blocks PSP hackers every chance it gets. But Apple battling hackers will get attention and at some point, the once sweet Apple might get too many sour stories affecting the taste. Apple thrives on rapid evangelical early adopters. After forcing users into one phone service, announcing a major price cut early, and now freezing people’s phone, there might not be enough of a good thing left to adopt.

If June 29th just can’t get here soon enough, here’s a nerd’s dream demo where you can hear Gary and Kate make pick-up-from-the-airport plans. Plus watch TV shows, look at pictures, and some other goodies. Nothing new, but it’s nice to just sit back and watch the consumer electronics magic.