Recently, Apple released a beta of the latest version of its iPhone operating system, called iPhone OS 4.0. As part of the release, it is distributing a new version of the software development kit (SDK) so that developers can write software that will take advantage of the new features of iPhone OS 4.0. The biggest advance is the ability to run multiple applications at once, called multitasking.

Currently, if you are using a third-party app and you answer the phone, the app quits. Further, third-party apps cannot run in the background and update (like you would want for weather, navigation, IM, etc.) The iPhone, like any modern personal computer runs many processes simultaneously. However, the ability of external developers to control this was limited in earlier releases of the iPhone OS. (Note that this limitation only applied external developers. Apple’s own apps multitask easily. For instance, you can take pictures or get maps while using talking on the phone.)

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iPhone 4, now with multitasking. Video still from Apple

Some developers have reported that Apple has made some subtle but significant changes to the SDK license agreement for iPhone 4.0. These changes increase Apple’s ability to generate revenue from users to the detriment of developers.

First, Apple added a clause to prohibit the use of third-party compilers to create code for the iPhone. Most developers already use the Apple tools and are not affected by new restriction. The exceptions are developers who use, or want to use, Adobe Flash. Just a few days before Apple released the new iPhone SDK, Adobe Systems released the latest version of its tools to create web sites and rich Internet applications (RIA) called Creative Suite 5. One of the big feature of CS5 that Adobe had been touting was the ability to create apps using Flash and compiling them to run on iPhones.

After several days of tense negotiations and public sniping, Adobe has finally thrown in the towel. In his blog, Mike Chambers, the Flash product manager, says:

“We will still be shipping the ability to target the iPhone and iPad in Flash CS5. However, we are not currently planning any additional investments in that feature.

…if you want to develop for the iPhone you have to be prepared for Apple to reject or restrict your development at anytime, and for seemingly any reason.”

By refusing to support Flash, either in its Safari browser or in applications, Apple ensures that developers for the iPhone must use its tools to create the applications. In turn, this means the developers must use the iTunes store to distribute them. These restrictions ensure that Apple will get a cut of the revenues and prevent distribution of apps that are not desirable. Adobe’s failure to anticipate Apple’s moves or create a viable mobile strategy is described in today’s Business Insider.

A lot of the content on the iPhone is free, so it may seem that Apple has generated a lot of negative publicity for itself for little benefit. However, having complete control over the single source of content for the iPhone will become even more important as Apple negotiates distribution of apps and content for its new iPad. If every book publisher, magazine publisher, television network, and movie distributor has to get approval from Apple for its content to appear on the iPad, then Apple is in a position to control pricing, promotion, and exclusive distribution rights. This can be very powerful and profitable indeed. [Disclosure: I do not own any stock in Apple or Adobe Systems, except as part of mutual funds that I have no control over.]

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Last week, another developer revealed that Apple has also added a clause to its iPhone SDK license to prohibit “the use of third-party software to collect and send device data to a third-party for processing or analysis.”

In passing, this would be seem to be a good thing. It appears to prevent application developers from invading the privacy of Apple’s customers, or using location services to display annoying ads targeted by geolocation data. However, it is important to view this ban as part of the wider battle between Apple and Adobe (and others) over mobile strategy. That’s because Apple doesn’t want to prevent developers from tracking users and showing them ads. It just wants to prevent them from using another company’s tools when doing so.

Last fall, Adobe Systems acquired Omniture, a web analytics firm, for $1.8 billion. At the time, I didn’t understand the logic. Adobe sells web and print design tools to designers. Web analytics software is purchased by marketing and advertising professionals. They are not the same people. Why would anyone care that they could now buy both products from the same company? But now as Adobe releases the latest version of its Creative Suite 5 web and print design software, it is pretty obvious what the advantage is. CS5 makes it easy for designers to integrate analytical markers into web content that can then be measured using Adobe’s web analytics tools. And as much of the web moves to mobile devices, distributing location-based advertising could be a critical source of revenue for Adobe.

Most software developers for mobile devices are not advertising-savvy. To help them, Apple recently purchased Quattro Wireless for $275 million and is using the technology from that acquisition to launch as its new iAd mobile advertising platform. Apple will sell the ads and give 60% of the revenue to developers.

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iAd mobile ad service, I insist you like it. Video still from Apple

However, by altering the SDK license to ban application developers from using third-party software, Apple is locking in developers to its service and shutting out Google, Adobe, and others. Through its actions, Apple has strengthened its ties to its most loyal developers, pushed away the ones that were using outside tools, stopped its competitors, and done it all in a way that isn’t highly visible to end users. These strong armed moves may not withstand antitrust scrutiny. But if they work, they will produce great revenue streams for Apple.

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