There is another point of view, that Apple has actually significantly expanded the iPhone case market, now that everyone is going to need one. Since Apple cannot create that many cases in a limited time, they will go and buy them from third-parties. However, Apple is a hard bargainer, so they will probably be buying a hundred for a dime, destroying the margins.

Market destruction with a free offer is a fascinating theme. The most famous example is Microsoft’s offering of IE and IIS for free, bundling it with Windows, and eventually wiping out Netscape Communications, once a $13B company. A lot of startups offer their services and products for free these days, in the hope of hitting it big via ads or some magic freemium model. This is basically a market destruction from the very beginning. When this happens, they don’t even need Apple or Microsoft to drop a nuke. The startups are destroying the market themselves.

A few of my favorites:

$8.2 Billion
Apple Net income for fiscal year ending  Sep 2009. ^[source]

$6.5 Billion
Google Net income for fiscal year ending Dec 2009. ^[source]

$14.5 Billion
Microsoft Net Income for fiscal year ending June 2009. ^[source]

What? Microsoft makes the same amount of money as Apple and Google COMBINED?

24%
Linux Server market share in 2005. ^[source]

33%
Predicted Linux Server market share for 2007 (made in 2005). ^[source]

21.2%
Actual Linux Server market share, Q4 2009. ^[source]

The Linux Servers were predicated to make Windows Server irrelevant one day. Looks like Linux is the loser now.

150,000,000
Number of Windows 7 licenses sold, making Windows 7 by far the fastest growing operating system in history.^[source]

<10
Percentage of US netbooks running Windows in 2008. ^[source]

96
Percentage of US netbooks running Windows in 2009. ^[source]

Android, Chrome OS, anyone?

• Microsoft’s roll-out of web-based and free Office is going to damage web office suites developers, like Zoho;
• Microsoft’s new Outlook 2010 is going to include social network features. Bye-bye Xobni (which is a social Outlook plug-in);
• Twitter buys one of the iPhone clients – Tweetie. It means all other iPhone twitter clients are screwed;
• Facebook, in addition to their Credits system, is rolling out an offers system – a very popular way of monetization. Wait till they make their Credits the only way to take money from the users, and numerous startups will kiss good-bye.

However, the top prize for screwing its ecosystem and partner network goes to Apple:

• Their are introducing their ad platform iAd. No doubt it will be the exclusive way for advertising on iPhones and iPads;
• Their new SDK licence agreement clearly prohibits use of any development platforms except for Objective C. This is a major blow to Adobe with their new Flash CS5, which includes tools to easily port Flash apps to iPhone OS. It also potentially makes Unity – a new platform for 3D  game design outlawed.

The lesson we all can learn: when your application totally depends on some company’s product for monetization or value for users, the company can evaporate your business in a blink. Our MobileNoter also falls into this category. People like our product, but if Microsoft decides to port its OneNote to MacOS and iPhone OS, we’ll have to have a much better product than theirs in order to win the customers.

May 2009: 900,000 users total; 12,000 paying users.

Nov 2009: 2,000,000 users total; 31,000 paying users.

The cost a user incurs is $0.09 per month.

A few observations:

1. The user base growth is very solid. Going from 900K to 2000K in just 6 months is cool.
2. Their conversion percentage is up from 1.33% to 1.50%. This is insanely important (unless the numbers were just rounded this way).
3. They are loosing money: $4.50 * 12 * 31,000 = $1,674,000 income. $0.09 * 2,000,000 * 12 = $2,160,000 costs of serving the users. Total is ($486,000) annually.
4. Those were just the costs of providing the service to the users. They also have user acquiring costs as well as development costs (to improve the service and to extend to other platforms). These costs are easily into $2-3M a year.

Note: I used $4.50 per month fee because it is $5.00 if you pay for a month. If you pay for a year, it’s $45/12 = $3.75 per month. Plus, payment processing is not free, especially for small transactions.

A few questions:

1. Is Evernote a good business? Not yet. Even if they stop all development, their operating costs give them a fat red number.
2. Will it become a good business? The trend is still not in their favor. However, even making losses, they might be eventually bought out by someone like Google, making a happy exit for the founders and VCs. It seems to be their strategy.
3. How does MobileNoter compare to Evernote? I won’t share any hard numbers, but if we stop the development, we’ll be cash positive.

So what we are going to do is to ride on the back of OneNote’s success and expand its reach into all other platforms that are not Windows. We are going to stick to this strategy and eventually displace Evernote as the #1 mobile and online note-taking software. What we don’t want to do is to burn money to embrace the platforms that are past their prime or just never going to be there, like Palm Pre. I won’t name some others to avoid controversy. So good luck to Evernote with burning more cash on the obscure platforms.

I will be posting more about Evernote and other competitors. Let’s consider this post as a disclaimer: we develop MobileNoter, which is a competitor to Evernote and other note-taking software. Thus, whenever I write on the topic, don’t forget that I’m biased.