Tuesday’s blog post from Paul on Widgets and Apps got me looking around at the economics of apps. My question was: What are apps displacing? And by inference: Does that make for a sustainable business?
“Dude, do you work at Nintendo? Do you have a corner office at Sony‘s offices in Minato, Tokyo? Good. Time to get up out of your chair, walk to the nearest fire alarm and yank it. Now, run screaming out of the building.
Because if what Apple ( AAPL – news – people ) announced today hasn’t woken you and your colleagues up, it’s time to have your executive assistant pencil “panic” into your FranklinCovey day planner.
Here’s the news. Apple announced Monday that users have downloaded more than 2 billion apps through its App Store. That’s the service Apple users to distribute applications from software developers to anyone with an iPhone or iPod Touch. Of the 85,000 applications available through the App Store, something like 80% are free. More than 21,000 of them are games.
Worse, of the 100 most popular apps, a mere 7% cost money.”
The article also points out that a Nintendo handheld game can cost $26.00 – here in Europe it is as likely to cost Euro 39.00. On a mobile the cost will be $3.00 maximum. What’s more it cuts out retailers and all those airport kiosks making a nice income from music and games.
The article was also covered in a newsletter from Matt Johnson of uTest who concludes:
“As bright as the future looks for iPhone app developers, it looks equally abysmal for many traditional firms.”
Where this leads, I think, is we need to conclude we don’t understand apps economics. We don’t know how many (the majority of) apps’ builders are getting by and what their business models are. We don’t know what the impact of apps is, we don’t know what they are taking attention and revenue away from. And we don’t know what a sustainable sector will look like.
Like many areas of the free, and free-to-premium economy and its near cousin the peer-to-peer economy – we really don’t understand – and yet when you see 2 billion interactions with a consumer base you wonder would the garment, apparel, sport or in fact any other industry allow itself to live with that kind of ignorance?
UPDATE: This below is a quote from an article sent to me by Lars:
This week, Apple announced that there have been 2 billion downloads from the App Store, which now has more than 85,000 applications. The number is humongous and quite simply unbelievable. Apple has shipped about 50 million App Store capable devices (including iPod touch). Assuming they’re all in use, that works out to 40 applications per device.
But you can’t really compare the lastest Zelda game for the DS to the typical minesweeper game for the iphone, or can you?
The economics of this kind of thing is discussed in depth in The Wealth of Networks.
Hi David
Not sure that it does – we know networks create wealth but we don’t know how 80 % of apps developers sustain their businesses. It’s a problem not only for apps but also for Skype and other companies that have grown multi million customers bases on the back of free (YouTUBE too!). So yes, we know these add to the general availability of services but not how we can sustain them. In that sense they may on balance be destructive of wealth
It is easy to see why the smartphone software industry doesn’t care about this kind of ignorance, and that’s because individual companies do not make the kind of money that can pay for the research needed to turn that ignorance into knowledge. Adding the fact that the smartphone software market is a global one with very few consumers, and you see how hard and expensive it is to actually do statistically significant research.
The mobile industry itself, of which the smartphone software industry is a tiny part, didn’t care because there was little money going round in apps. That’s changing, so we might see some research being sponsored by the people with the money.
Also, don’t forget that smartphone apps were all but dead two years ago. Rampant piracy, shrinking revenue shares. Apple’s App Store saved the smartphone software industry, without them it would be dead now.
The industry is sustainable if people make enough money. Whether it is possible to do so when there are tons of free apps around is a difficult question to answer. Part of the reason that there are lots of free apps around on App Store is because you cannot have demo apps on App Store. Apps must either be free, or paid for and fully functional. How big that part is is a matter of counting the number of free apps that are lite versions of paid apps, and comparing that to the total numbers of paid and free apps.
Free apps are good for device makers and less good for isv’s. Lots of free apps help sell devices, and add to the cost of the App Store infrastructure, so for device manufacturers and operators having the right mix of free and paid for apps is important. Too little and not enough people buy a device, too many and running an App Store costs more money than it generates in extra device sales.
But even though the ISV situation is now much better than it ever was in the past, it is by no end as good as a number of notable software periods in the past, like the home computer boom of the eighties, or the MSDOS and windows booms of the eighties and nineties.
About business models, I don’t think many companies in the smartphone software bizz have a business model. People know how to program, they have a PC, tools are free, their time is free, they might make some money doing it next to a real job. If they make some money, fine, and they might even start a proper business. Otherwise, this is one of those hobbies that can pay for itself.
Great insights Sander – thanks. Would yu care to write a post for us along these lines? I’d love to capture some of your company’s experience here.
Perhaps they are not displacing anything. Let’s take for example an application that helps the user call taxis.
It’s a win-win situation in this case. The customer doesn’t have to look on a guide for cab companies and s/he can choose the best and most convenient service. So unless you were producing and selling the cab companies’ business cards and flyers, nobody loses!
Perhaps yes.
I’ve noticed what Sander van der Wal says in this model: many iPhone app developers produce two versions of their programs: one lite which is free and the real thing which costs. The customer can try the free (which is a crippled/limited version which plays the role of the demo) and then, if s/he likes it, s/he can buy the full deal.
Freelance developers and small teams surely make some money, but I’m not sure if big software houses can break even unless they make a real global blockbuster!
I have a Nokia N97 mobile phone and I would like to get the Handy Clock for my phone but on checking I find the N97 is not listed for use with my phone. When will it be available for my phone please?
I think there is an issue for everyone involve din “free” Kensai. My understanding for example is that Skype is hitting problems because it has to support tens of millions of free users (not just a data centre and bandwidth issue but also a customer support one). The costs are difficult to cover with fees from paid. Apple likes everyone to think it is raking money in with Apps and maybe it is but there is a cost to that too. And there is a break even for all our member companies that is not necessarily as clear as we might think.
I picked up this from a link sent4 to me by Lars (thanks Lars):
‘This week, Apple announced that there have been 2 billion downloads from the App Store, which now has more than 85,000 applications. The number is humongous and quite simply unbelievable. Apple has shipped about 50 million App Store capable devices (including iPod touch). Assuming they’re all in use, that works out to 40 applications per device.”
The author is Joe WIlcom and the article here.
Some of the mobile app developers are being funded by getting a cut of advertising. See http://www.bnet.com/2403-13237_23-343422.html and vendors like adMob http://www.admob.com/appdevs are providing kits for developers to monetize their apps.
[...] upcoming debate around mobile apps and ad revenues, a point raised by Paul in the comments to the App-enomics post last [...]
The vast majority of independent app developers don’t make any money – certainly not enough to cover a reasonable cost for their time. There are major exceptions and niches of course.
I don’t see why an average of 40 apps per iPhone is unbelieveable when they’re nearly all free and the data download costs are already included in the plan though. I bet there are power users out there who’ve tried out hundreds of apps. Then there are all those bloggers who’ve downloaded several thousand skewing the stats. The total download number isn’t very interesting – the total revenue number is, and some kind of distribution curve across individual submitting companines/individuals would add significantly to the interest. I doubt Apple will be sharing that any time soon though.
This is a buisness model based on hope for a future market that is only just starting. Some companies are building free apps now just to get themselves a reputation for the future and hopefully also get some service business building apps for other people (who often just want to get their brand extended onto mobile devices).
Good Applications designed for iPhone are nothing short of amazing. That’s because they leverage the groundbreaking technology in iPhone — like the Multi-Touch interface, the accelerometer, GPS, real-time 3D graphics, and 3D positional audio. Just tap into the App Store and choose from thousands of applications ready to download now.