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June 22, 2010

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Henry Sinn

Tomi,

Well said. Large numbers of people are clearly wasting large amounts of money...

Downloading an app, paid for or otherwise, is still step 2 of a process.
Step 1 is discovery... I'm interested in... I want something... Then there is a call to action -> I do something / act / download..

You know where this is going....

Henry

Michel

Wow. This is clear!

sami

Nice blog Tomi, thanks! Would you have an idea what's the median of development costs of paid apps? Lots of apps look like quick hacks, maybe there's some tail in distribution of development costs as well as sales?

Chris

There's a lot of sense here. Apps are definitely NOT a reliable way for a developer to earn money - those gold rush days are gone and can only exist in the early days of a catalogue when you get to appear high in the listings due to the small amount of titles available.
However, we really need to be able to separate out the developers who are scratching their itches from those who are trying to make money. There are no figures (that I've seen) which attempt to separate these two groups, perhaps it's not possible without focussed developer surveys. Until those are discounted, then the true (lack of) opportunity continues to be hidden.
For those who are developing for fun or to make something to go on a resume, iPhone is a great platform. For everyone else though, it should be a minority platform - no more important than any other smartphone platform, and smartphones as a whole should be less important than featurephones etc.
Of course, depending upon your exact customer demographic, iPhone owners could well represent more than 3% - I think this is a point you have missed where some brands can really exploit the opportunity. You have to really know your customers though, so maybe most don't have the knowledge to make such a decision with facts.

Maggan

I agree that app development isn't get rich quick guarantee, but there are a few things that I miss from this analysis:

How does revenue from ad-supported apps fit in?

How many apps are variants of the same code base? (e.g. how many travel guides share the same code, with different content, thus lowering cost of development?)

How does the economics of having your app developed e.g. in India factor in? (I know one developer who had an app developed for 1000 dollars in India. No great bread earner, but a counter point to the 15 000 to 35 000 dollars cited. There are ways of significantly lowering your costs for development)

How does apps that are developed as marketing fit into this analysis? Many apps are basically adds, e.g. for cars or movies, that don't even have the goal of making money from app sales.

Interesting analysis, but I think it is too simplistic when grouping all apps into one big family. There are many reasons why apps are developed, and many ways apps can generate revenue apart from the sales.

/Maggan

Romain Criton

Hi Tomi,

There are a couple arguments I don't agree with in your analysis:
- about your Web vs Apps examples: actually if you look at all mobile apps, you realize that many of them are just gateways to some sort of web service that you could very well access in a browser. Just a few examples: all the Twitter apps, Evernote, Ebay, Yellow pages apps, the list goes on... Then why people would favor accessing their web services through an app rather than in the browser ? I think it boils down to the superior user experience offered by apps. User experience is key on mobile, because mobile users don't have the patience and attention span to cope with a clumsy or unresponsive interface, and apps are much better than web in that respect
- it is just unfair to compare iPhone apps to the Idol SMS voting campaign. This campaign did make a lot of money only because it relied on a very strong brand and/or content. So you are basically saying to the average, struggling iPhone app developer: "go talk to big, powerful brands and develop SMS services for their brand and/or content". Is it really easier than selling apps in the App Store ? Plus you don't mention the revenue split between the TV network and the SMS service developer. I doubt the developer is getting 70%. On the other hand, developer who are backed by strong brand and/or content usually do well in the App Store, so I don't think your example is that much relevant
- about Hilton Hotels "idiots": yes they would be idiots if their target was "everyone on planet earth". However, I'm sure Hilton does not want to address everyone, they are going after the wealthier segments of the population. And if you look at iPhone penetration rate among this sub-group, then i'm sure you find much higher figures. So in the specific case of Hilton I think it makes sense to skip the most basic technologies and address high end phones. Of course they should also have done it on Blackberry (and probably target Blackberry first), and that's a mistake if they didn't

Last but not least, mobile apps follow the same long tail pattern as many other industries where a few succeed and many struggle: music, movies, video games, consumer software in general...
So do you mean that all small, independent record companies, movie studios, game studios and software developer should just give up and look for other opportunities ?

Baldur Bjarnason

Dismissing the iPad as an app market is risky, not because your analysis is wrong (it's pretty much 'on the money' as they say), but because it's a different sort of market. My initial impression of the iPad app market is that it is more of an application market, e.g. higher priced, functional, non-consumption applications, with the iphone version as either a free loss-leader (separate app) or as a value-add function (universal app).

Of course it's always going to be a niche market compared to mainstream smartphones (let alone feature phones) but it won't take long for it to become a software market that rivals the size of the Mac software market. It's a different animal, that's all.

Also those that try and nitpick your argument by referring to the mass production app facilities or shared code use like Taplynx/Appmakr those just make the iphone app dev story worse. Those who try and develop 'quality' apps with a 15 000 -35 000 dollar budget are competing with a horde of 'good enough' cookie-cutter apps made for next to nothing.

Although, considering the numbers in your analysis it doesn't seem to be a coincidence that Taplynx's enterprise package costs $599.

Roger Browne

On the other hand, if you are a great all-round programmer and designer AND you can single-handedly develop ten apps per year that have a commercial life of say three years each AND each of those earns the average of $3,050 per year, by the third year you'll have built up sales of $90,150 per year.

Of course it's not that simple, but this rough calculation shows that for some single-handed developers there is some light in the tunnel.

developer

Thanks for the calculations. My company will not start developing apps to Nokia devices now because the revenue is likely even whole lot smaller compared to iphone apps.

Daniel Perry

Tomi:

Thanks for your thoughtful, straight-from-the-hip analysis. I have believed the app-frenzy to be misguided but didn't have the research (or guru status like yourself) to really answer those who reflexively say "We have got to have an app!" My continued reading of your blog has paid BIG dividends by saving me money and time NOT going down a false trail. Thanks!

Dan Perry
Twitter: DanielPerry

Colm McMullan

Tomi, fascinating article. I'm an independent developer and recently launched a World Cup iPhone app called 'Total Football 2010' for this summer's World Cup, a really unique sports app providing rich in match stats and visualisations of every match event including every pass, shot, tackle etc:

http://www.totalfootball2010.com

It's been extremely well received and the reviews in the App Store tell their own story, overwhelmingly positive. My costs involved two months developing it and paying a third party for the license to use the data (which was a fairly hefty cost for an individual like myself), it's 100% my own work and I took a break from freelancing to give me the opportunity to complete the app. I hoped that at worst case I would cover my costs and best case it would prove to be popular enough to allow me to continue development on the concept to apply to other competitions after the World Cup.

My numbers so far are very much in line with what you are discussing. Even though the app has been reasonably successful (in the top 10 across a number of European countries and particularly strong in the UK where it's been in the top 5 selling sports apps for the last couple of days) I'm still struggling to break even on the venture. In part, I'm sure this is due to the fact that I have zero marketing budget but the app has even been featured by Apple on the App Store homepage and sales have decreased since that happened! To give you an idea though, the app is outselling apps by large brands such as The Times (of London), the official England football team's app and other large brands here in the UK. I dread to think how much they invested in the apps to see even smaller returns than I'm seeing!

In truth, this shouldn't really be taken as a standard business case study. I'm an individual developer who was really scratching an itch, I knew this kind of app was possible and have been massively frustrated that no 'big brand' was using the data I am to provide a really rich experience for users. Also, it's actually been a pleasure to work on from a development point of view, the iPhone platform is fantastic from a developer's perspective. I'm incredibly proud of the app I've built, the feedback I've got and I know the experience of doing this is going to be fantastic for me in future. I'm still very hopeful that the app will come to the attention of someone with a budget who will be interested in the future development of the concept - whether that be in mobile apps or not!

So even had I read this article 3 months ago I probably still would have went ahead with the idea. But I just wanted to chip in with personal experience and reaffirm the message you've laid out here. Don't be taken in by the hype, be realistic in what you expect your returns to be and be very aware that the long tail is very very long...

If anyone is interested in discussing my experience, please feel free to get in touch at the email address below or on twitter.

Thanks!
Colm

Twitter: @colm @totalfootball10
Email: colm.mcmullan@gmail.com

LG

Welcome to the (insert sector) business.

If you have 1 product/artist you risk/reward is far too high (unless your damn sure its a hit). You need a minimum of 10 products and hope that 1 of those will be a hit that pays for the the development of the next hit. If you get 2 hits then time to crack the champagne.

Its the same for software, venture capitalists, music, film, TV, etc etc.

What to do about it? license your stuff to someone who can afford to take the risk or get together with a bunch of other like-minded devs and form a partnership. (note the latter rarely seems to work)

Brad Dickason

@romain I agree with you that a valuable market segment is left out here: Free apps that exist to serve paid web apps.

For example, we're developing web-based salon software and plan to build an iPhone app to drive adoption. Our primary users are stylists in a salon and the buyers are salon owners, so we need to leverage the fact that stylists will get excited about an iPhone app and thus pressure their employers. Many other services have similar models ala eBay as you pointed out.

Chris Ionescu

All we need now is for everyone else to copy the Apple App Store experience, because for most other devices it just sucks.
Also, besides the total market size for other devices, I wonder how many paid apps are actually being installed on non iPhone or non smartphone devices. Is there another ecosystem with a larger revenue base? Is it reasonable to think any device that cost less than $100 (before subsidies) will bring any app revenue at all?

Alexander Gödde

@Chris Ionescu:
I don't think that devices below a certain price threshold do not generate app revenue. Sure, customers with the money to buy a $ 600 device will have more money to spare for applications, but for a lot of people mobiles are not a status symbol, but a tool, and if an app gives it extra abilities that they need, then they will shell out. Similarly there is a market for gaming that stretches far beyond luxury devices.

David Bishop

If I went into a software store and saw over 50,000 pieces of software littering the aisles, I would not be surprised to know that most of them made just $50 a month. In fact, I would consider that a good thing... the best chance some of those apps have at making any money at all.

The fact is the App Store is easy: make it and the marketing and distribution are already partially/completely done for you. In this scenario, there will be tons of apps that are only there because it's easy. To expect that most apps should be making hundreds to thousands a month would be to deny the basics of business.

The fact is there are standouts in apps where people have put in lots of time, money, and polish: those will typically make a healthy return on their investment. All the Joe Blows out there making apps in their spare time should not expect this kind of return.

None of this is bad news. This is just the way things are.

Justin Vincent

I developed my iPad app "Swarm SG" in less than 1 month spare time using Titanium Appcelerator. been out for a week and sold a whopping 20 copies @ $3.50 a pop. I'm already in profit ;)

Brad Waller

Great analysis. But the long tail you reference is also full of "crap apps" developed in bulk overseas for pennies on the dollar. This also skews the numbers and needs to be taken into account. I would guess that the long tail of cheaply built crap apps with low sales offsets the expensively built apps that have advertising budgets and get sales.

Also, many of the "expensive" apps are built for corporate clients who use the app as branding, for sponsorship, or as part of an integrated strategy that includes Web, mobile, and offline components.

Your estimate that an average (dirt cheap) app costs $15,000 to develop only applies to a select group of apps built by large companies and agencies. There are a lot of great apps developed for costs in the $3,000 to $5,000 range that fill out the "average" of the data. They don't make the top 25 (usually), but they don't have to because they were not made for this.

Independent developers (like us) can and have developed apps for a fraction of that for clients. A programmer can make $35 to $50 a hour building apps for a fraction of $15,000 offering their clients high quality apps that are exactly what they are looking for.

Peter V.

Until I see case studies in support of this conjecture, I'll take the opinions stated in the aforementioned blog with a grain of salt. There is consistent mixed usage of mean and median. The amalgamated numbers themselves are estimates at best. This your typical a -> b -> c redux and verbal masturbation that true economists would avoid.

Show me some science. By throwing more numbers at your audience in argument against numbers you are undermining your own argument. Good grief.

Chris Glode

Great post Tomi, but I think your biases are showing quite clearly.

Developing SMS and web apps are not as cheap and simple as you suggest. For example, sending and receiving SMS from a server is very expensive in many countries (as you know).

Go try to make a simple quiz application and charge $2.99 for it via SMS. It may take you 2 weeks at $3K to develop, but I promise you will be more than $35K and 6 months in once you are done working through your SMS aggregator, premium SMS billing and rev share contracts and functionality.

In the end, you will certainly not be getting 70% rev share, you WILL have high monthly minimum costs for short code and MT SMS, and, customers will have no way to discover your app until you buy media.

It is true, that being stuck in an app store cluttered with 200K apps is not exactly ideal, but the fact is that millions of customers go there and search for apps. There is no such marketplace for SMS and WAP, and further there is no easy way to charge for same.

In short, my point is: there is no disputing your statistical analysis of app store economics, but to suggest that SMS and mobile web are a great alternative is not telling the whole story.

The market is clearly screaming for a viable marketplace for SMS and mobile web apps.

Simeon Simeonov

Solid data but it misses the larger point of why people get so into mobile development.

See http://bit.ly/iPhone-economics

Iain

No mention of iAds?

You should change the title of your piece to "Full Analysis of iPhone App Store Economics".

Chris Smith

9 out of 10 businesses started in the US fail within the first year. Therefore, if you start a business, you have a 90% probability of failure. It follows that there are no rational entrepreneurs.

Is the above analysis correct?

Why don't you try the same analysis for the consumer Internet or the music industry. Will you draw a different conclusion?

Tomi T Ahonen

Thank you all for the comments, I will reply to each individually soon. Keep the comments coming

Tomi Ahonen :-)

Thom Denick

I think overall your estimates and break down of the economy are fairly correct except for one point - your app development costs. Yes, if you hire an outside company made up of many individuals, developing an app *might* cost $50,000.

The vast majority of apps are not developed by those types of companies, they are developed by an individual or small group of individuals developing the app in their free time. The costs are a fee to Apple ($99/year), a mac ($700 for a Mac Mini), and the price of your free time developing the app. I'd say an individual's free time is better spent developing software as opposed to say watching TV.

This kind of discouraging analysis is completely tossing out what has made Apple's store a hit - it's accessibility to amateur developers. Yes, it's probably not possible to quit your primary job because of App sales, but you don't lose anything by trying, and an extra $1K a year or so can help pay for computer upgrades, a cheap vacation somewhere, software...

My first App(http://www.smorpheus.com/DirectReport/) is moderately successful and well above the median, and maybe I'm the exception, but I think a well-programmed good idea for an app can turn into a respectable side business.

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    Tomi Ahonen is a bestselling author whose twelve books on mobile have already been referenced in over 100 books by his peers. Rated the most influential expert in mobile by Forbes in December 2011, Tomi speaks regularly at conferences doing about 20 public speakerships annually. With over 250 public speaking engagements, Tomi been seen by a cumulative audience of over 100,000 people on all six inhabited continents. The former Nokia executive has run a consulting practise on digital convergence, interactive media, engagement marketing, high tech and next generation mobile. Tomi is currently based out of Hong Kong but supports Fortune 500 sized companies across the globe. His reference client list includes Axiata, Bank of America, BBC, BNP Paribas, China Mobile, Emap, Ericsson, Google, Hewlett-Packard, HSBC, IBM, Intel, LG, MTS, Nokia, NTT DoCoMo, Ogilvy, Orange, RIM, Sanomamedia, Telenor, TeliaSonera, Three, Tigo, Vodafone, etc. To see his full bio and his books, visit www.tomiahonen.com Tomi Ahonen lectures at Oxford University's short courses on next generation mobile and digital convergence. Follow him on Twitter as @tomiahonen. Tomi also has a Facebook and Linked In page under his own name. He is available for consulting, speaking engagements and as expert witness, please write to tomi (at) tomiahonen (dot) com

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