The Apple strategy tax

In episode 6 of the now-defunct StackOverflow podcast, former Microsoft employee Joel Spolsky talked about one of the many things that holds back large companies like Microsoft.

Spolsky: But synergy…there are also negative synergies. In the case of Microsoft they call it "strategy tax." Where, like, the Internet Explorer team is not allowed to fix the DHTML editor because it might compete with Word. So they’re forced to make that continue to be bad.

I've been thinking about the concept of a "strategy tax" while watching Apple's latest round of App Store policy changes. Competition between divisions within a large company has, at various times, been lauded as a best practice. But danger lurks on both sides of the issue. Too much internal competition can lead to a lack of focus, with divisions pulling in all directions at once, causing the company as a whole to stand still. Allowing too little internal competition, as in Spolsky's Microsoft example, results in the absurd situation where a company handicaps its own products.

On the surface, Microsoft's situation seems very different from Apple's. The mighty Microsoft of the late 1990s owned a substantial portion of the desktop application market. Internet Explorer wasn't just a web browser—it was the web browser. The same went for Word, Excel, and of course that platform it all ran on, Windows itself.

The Apple of today may be running up the financial charts, but aside from the iPod, it has no product line or platform even close to Microsoft's level of market domination. If, for example, Apple decided to keep some features out of iPhoto to keep it from taking sales away from Aperture, then Google, Adobe, and others would be more than willing to pick up those customers.

But it's telling that I used a Mac application in my example. There is one realm where Apple's situation is a convincing microcosm of Microsoft's: the App Store.

No, Apple's own iOS applications don't dominate the App Store like Microsoft's applications dominated the desktop PC market. But while Microsoft may have controlled its own overwhelmingly popular applications, Apple has complete control over all applications that appear on iOS. This gives Apple the power to handicap or even outright eliminate other companies' applications in favor of its own.

This is not just a theoretical power. Apple has wielded it freely, starting with the rejection of applications that "duplicated existing functionality," (i.e., "competed with Apple's applications") back at the dawn of the App Store, and continuing through to today with the potential elimination of any iOS app whose content or subscription business model can't support another 30% taken off the top of its revenue stream.

There are often plausible altruistic motivations for these decisions. For example, allowing applications that duplicate the functionality of built-in apps (i.e., the phone dialer or SMS app) could cause consumer confusion. But either way, third-party iOS developers seem like the aggrieved party here. So how is this strategy a "tax" on Apple at all?

You do it to yourself, you do

The essence of a "strategy tax" is something that keeps a company from reaching its full potential. Fielding an inferior product to avoid stepping on the toes of another one of your own products is one example. Eliminating or handicapping potentially superior products created by other companies may not seem like it fits the bill, but consider Apple's position as a whole.

Apple's long-term success is tied to the success of its platforms. These platforms, in turn, rely on the efforts of third-party developers—that's the very nature of a platform. Given this, if the health and success of the platform is to be maintained, anything that hurts third-party developers must be offset by some other advantage to customers.