Steve Jobs pointsI’ve been straddling the fence lately on the number of issues coming in front of the government’s eyes, from the net neutrality issue to the Google acquisition of AdMob. And I don’t mind sometimes taking either side. It helps see the issue in a different light.

So this time I’m going to expand on a recent call I was on that discussed the issue between Apple and Adobe, and as you know, the FTC may be looking into the Apple’s changes in its SDK T’s and C’s, after being lobbied by Adobe. By now you’ve seen the Steve Jobs letter, which you may view as a response to impending action, or a total rant. I leave that up to you.

For this piece, I’m going to take the side of Apple, again because of a recent discussion, but I’m comfortable taking the Adobe side too (which by the way is also the Google and Microsoft side too even if they are not actively promoting it).

There are a number of reasons for Apples moves. It depends on which ones you believe.

The technical reason is that the iPhone and the iPad are very limited devices. Technically speaking they have about 1/10th the CPU power of a desktop PC or an iMac. Flash is increasingly a heavy burden even on today’s PCs and iMacs and is also very memory dependant. The iPhone and iPad, bu contrast, have very limited memory footprints. So therefore, in Apple’s mind, OS 4 is not a good choice for Flash. Yes, there is Flash Lite, but it never really caught on in smartphones. It does run on low memory but it doesn’t run full native Flash apps in the minds of developers.

Then there is the political reason. Apple loathed Flash to begin with, and the more importantly, the company doesn’t want any 3rd parties coming between itself and its developers, or itself and its customers. Apple has always been about control up and down the platform, and today that also means up and down the software stack.

How long has the iPhone been out now? Since day one, it wasn’t designed with Flash in mind. It wasn’t until OS 4 and the iPad’s debut that Apple’s intentions were made clear— no Flash! Apple is also not allowing developers to cross compile. Adobe on the other hand, is cross compiling by taking a Flash player and embedding it into the executable, bypassing Apple’s platform tools. But this still won’t make it past the App Store reviewers.

The press tends to lump developers into two camps— Apple developers and Flash developers, but reality has it that developers are commonly writing for at least two or three platforms when it comes to mobile and also for the Web. The bigger the firm, the broader the development platforms supported. But most smaller development shops cannot afford to write for four platforms. With 200,000 apps in the App Store Apple clearly doesn’t need more app volume. They argue that they need better app quality, and not supporting Flash is one way to get there.

To Apple, the app is the direct link to the customer. And brands are sharing this view too. And more importantly, in the advertising space brands don’t want to keep paying to talk to their own customers. Today they have to do this by working with multiple mobile ad networks and analytics firms. But with Apple, once their app is on the device, they get a direct connection to the customer via updates, emails, and social media channels. This means they can develop direct personal relationships, knowing that it’s a validated person sitting on the other end.

Apple speculates that its ad business will be a $1 million market opportunity, but its hardware opportunity with iPhone and iPad is 20 times more. With a 45-50% margin on the iPhone, it’s hard to make that up in ad sales. But remember, that Apple not only makes margin on the iPhone and iPad hardware, but also collects royalties by licensing out the connector. This means it gets a cut of all 3rd party accessory sales as well. We haven’t seen many 3rd party accessories for iPad yet like with iPhone, but give it time.

The challenge for Apple is to get ad agencies up to speed on developing compelling ad content. The argument inside Apple was that if they didn’t get into the ad business, they’d end up with sub-optimal ads on the platform, and a lousy customer experience, which is not what Steve Jobs wants.

For major brands, they have an opportunity to work with agencies to develop compelling mobile ads for iPhone and iPad. They also have to deal with only one analytics solution (Quattro Wireless and iAd), meaning they’ll cut out a lot of middlemen who stand between them their customer. This will save time and money, and it makes it easier to create the ad once and deliver it a million times. But it will still cost more to make an ad on Apple; you’ll just save on the distribution costs.

Ads have moved from being informative to being entertaining over the last five years. I used to wonder how long it was going to take US ad agencies to shift this way, after seeing many entertaining European and Asian ads for many years. But Apple is looking beyond pure entertainment when it comes to ads. It wants ads that will add customer value, that compliment or enhance the platform.

Agencies may first push back on the bar being raised, and Apple will need to develop resources to help them get there. Apple is hoping that agencies will end up caring about the ads they produce for the platform.

Right now there’s a lot of Flash banner work still being done at agencies. Over time, a lot of that work will be moved to HTML5, with Apple and Google, and even Microsoft pushing developers, but at different speeds. HTML 5 is an opening for Apple to create and support a least common denominator. Google’s been voicing its opinion that Web apps can be as goods as native apps, and be very rich, but many people don’t believe that is true, certainly not today.

If developers are forced to learn the new Apple tools, agencies will have to jump in faster, because they’ll need to control people’s experiences with the ad. Apple will eventually move agencies and developers to HTML5 (as will Google and Microsoft), and we’ll see other phone platforms support it as well, in different phases. This will create an additional flurry of native app development, enabling Apple to make money again on the software while controlling the environment.

There are over 100,000 Apple developers and over 200,000 apps on the App Store. The purpose of ads is to keep dollars flowing to developers, keeping the apps themselves cheap. Apple doesn’t need to sell its iAd platform everywhere but it does need high quality ads to come out of it. It doesn’t have the resources to be inundated with ad inventory from all kinds of ad networks, with all kinds of analytics code embedded in it. That’s another reason for the lockdown on tools and T’s and C’s.

Apple will need to make agencies think long and hard about the ads they create. Agencies will have to hire a lot more interactive programmers, designers, and strategists in order to reach this next rung on the ladder. Obviously, old Flash ads won’t cut it! Higher ad development costs should result in high quality ads running on a high quality platform, with a direct link and an open social channel to the customer. At least that is Apple’s argument.

Apple’s all about preserving the customer experience and not letting them get into a place where they can get lost or frustrated. If customers don’t want Apple, there are plenty of other choices- Android, which is growing rapidly; Microsoft, which is resetting itself with Phone 7; RIM, which has embraced the WebKit browser (joining Apple, Android, and others); HP, which has bought Palm, inheriting WebOS in the process; and Nokia which has moved Symbian into a Linux environment.

One thought in the discussion I recently joined was that Apple is optimized for playback, so you should view them as a game console. Today, game consoles are all about the app, the experience, and the online marketplace. They are controlled environments that work well for customers and are optimized for developers. They are environments where curation happens.

Many people are talking about the fact that the future is the browser in five years, and Google’s doing a good job of making this point both publically and privately. But the reality is that we aren’t there yet and Apple believes its solutions are better than Flash and better than native Web environments.

Flash is coming to Android. Google and Adobe are working on it, and expect something this summer. Flash runs better on Android than it would on iPhone because of a bigger memory footprint and more processing power. It will be interesting to see if Google will be able to run unrestricted Flash-based apps and ads on Android. Many think it won’t be possible because of the CPU and memory headroom that Flash demands. Stay tuned!

Apple’s is out hiring business managers for each category section in the App Store, and had been courting the top ad agencies. So far, the agencies seem to be on board. Its message to developers and agencies is that you don’t want to run your flagship app or ad in Flash. You want to run it native on the iPhone and iPad, where it will be properly curated, with a stream of analytics provided back to you, offering a direct connection to the customer, which you haven’t had before. There are some disgruntled developers, but Apple has a chance to bring them into the fold at the developer conference in June.

Adobe’s approach is to write once and port the app across multiple platforms. I actually coined a white paper for them back in February of 2007 around “Creating a More Engaging Mobile Experience” that included this vision. This was four months before the iPhone was officially released. Adobe thinks that Flash is the base program that everything runs on, across multiple platforms and in many places. And this way of thinking now runs against that of Steve Jobs and the people at Apple. The two companies couldn’t be more orthogonal to each other.

Will the government step in? Will Apple have to make changes to its developer tools and T’s and C’s? Personally I think Apple’s actions are more to rattle Google and Microsoft, but Adobe is the focus right now.

They all are playing a big chess match, and remember, the App Store is only 24 months old. I’m curious about your thoughts!

– Randy Giusto