Full Analysis of iPhone Economics - it is bad news. And then it gets worse

I promised to return with the full analysis of the iPhone App Store economics analysis, from every angle, with all data I have managed to find. This blog intends to paint the most accurate picture of the specifically Apple related iPhone App Store market economics - and lessons from here should apply to most other smartphone app stores as well. The one final piece of the puzzle that had been missing, that we desperately needed to ge the full, honest picture, was the Apple official revenue number, which we finally got a few days ago, at $1.43B total revenues generated over 2 years, and thus $1B paid to developer. Now we can do the full analysis. But first a few general comments.

ACTUALLY I LIKE APPS

There is nothing inherently wrong with making a smartphone app. I have warmly welcomed the apps opportunity to smartphones, years before we even had heard of an iPhone (my first book on mobile services, a global bestseller, has the word 'apps' in its subtitle). As most developers will instinctively underestand, if we compare mobile web services to smartphone apps, there are some obvious extremes where one is far superior and the other would be very clumsy as the solution. Take apps - if you want to deply Tetris as a stand-alone time-killer game for a phone, it can be done via a web app on the mobile data connection (seeking each next Tetris block from some server 'in the cloud' but that would be hideously tedious, overkill in a web solution. You want the app once downloaded onto the phone, and then never to connect and just offer us the Tetris entertainment whenever we have some minutes to kill - even in situations where a network connection is not available, say on an airplane or in the London Underground subway trains. For a single user (ie non-networked) game, in most cases by far the most elegant technical solution is an 'app'.

Similarly there are cases where an app would be ridiculous. Take Google Search. We could theoretically attempt to install several times per day the full Google search environment with all web links onto a 'smartphone' - but the hard drive storage ability (and the web data load to install it) would be somewhere approaching the capacity of a modern super computer. Yes, a web search 'solution' could theoretically be deployed via a stand-alone app, but it would be the clumsiest dumbest way to deploy that, when a simple mobile web/WAP connection is all we need and a browser. So we understand, there are some extreme cases where a 'pure' app or a 'pure' web service is the natural solution, where the other is not a viable rival.

For most of our services the world is not so extreme, there is considerable overlap, and often hybrid solutions - say a multiplayer game would typically have an app part, and a real time online (mobile web) connected part. Doing both. So please do not think I somehow hate all apps. I understand there is valid need for apps and as the smartphones get smarter, with ever more inbuilt storage ability, it makes sense to deploy many of our 'mobile utilities' via apps - whether pre-loaded onto the phone upon delivery from the factory, or post-purchase installed by our employer IT department in the case of corporate/enterprise apps, or ourselves in the terms of 'App Store' apps.

I honestly do think the App Store opportunity, as re-vitalized by Apple iPhone in 2008, is a great development and adds to the options for developers, and enables better 'magical' experiences as I have often celebrated apps that I really like. With that being said, the recent hysteria around the Apple iPhone App Store, has reached fever pitch, and the industry pundits and reporters have often fanned the flames to create a hype around the Apple iPhone App Store, that distorts the whole opportunity. Because of the counting of how many billion downloads, the whole mobile services industry has jumped on the 'App Store' bandwagon and more than 30 new app stores have launched and all reason has been cast aside.

The purpose of this blog article is to examine the economics - and hopefully help guide potential developers and investors - into seeing where is the real opportunity (if any) and where are the dangerous pitfalls. If it is, as I have been claiming now for many months, that the App Store hysteria is developing into a tech bubble, and that most developers will never recover their costs, then the sooner you the reader can understand this, the sooner you can make the needed moves to minize your losses (or to avoid future and futile attempts to enter this area). I am confident in the long run there will be a vibrant and reasonable-sized market opportunity. but today all numbers scream the opposite. The math simply does not add up.

THE BIG NUMBERS FIRST

So lets start with the 'big picture' numbers and those that come directly from Apple and/or are calculated directly from those. We have the points in time when the 1B, 2B, 3B, 4B and 5B download milestones have been passed. These points in time do not conveniently coincide with December and June time points to allow easy annual calculations, but I did a linear allocation of the growth rates and have harmonized the data to the data points. Then I took the published 1.43 Billion dollar total iPhone App Store cumulative revenues (before Apple took its 30% cut) and allocated that in exact proportion of the total downloads. Please note that these numbers are 'more accurate' than the previous quick distribution I did by dividing the 1.43 Billion simply into four equal quarters of the same growth rate. In reality, the App Store has achieved increased growth rate recently and the revenues should reflect that. Here are my adjusted numbers:

Period ending.....Period downloads.....Cumulative downloads....Period revenues
Jun 2008............no apps...................no apps........................no revenues
Dec 2008.............600 M......................600 M..........................$ 172 M
Jun 2009..............800 M....................1.4 B.............................$  228 M
Dec 2009..........1.6 B.........................3.0 B............................$  458 M
Jun 2010...........2.0 B.........................5.0 B............................$  542 M
Total.................5.0 B.........................5.0 B............................$1.4 B

So based on this revised table, we can see that in the calendar year 2008 the total downloads were 600 million and revenues $172 million. In calendar year 2009 the total downloads were 2.4 Billion and total revenues $686 million. In calendar year 2010 so far (half year) we've seen 2 Billion downloads and $542 million in revenues.

If you prefer to look at the first and second full year of iPhone Apps (ie counting from July to June), in the first 12 months of iPhone Apps, they achieved 1.4 Billion downloads and $400 million in revenues. In the second full year there were 3.6 Billion downloads and $1 Billion in revenues.

Now for the total revenues generated by the iPhone App Store, 1.4 Billion dollars, when divided by 5 Billion total downloads over the past 2 years, the average revenues generated across the whole apps space, including paid and free apps, is 29 cents. After Apple takes its 30% cut, the average income earned by all apps, paid or free, to the developer, from end-user payments, is 20 cents per downloaded app. It is one legitimate way to look at the whole market and its total economics. But don't worry, I will split this by paid apps and free apps.

NOW THIRD PARTY DATA

So then how many of the total apps are free and how many are paid. There are lots of assumptions about it, but there is one specialist company which measures the total App Store environment and counts the paid and free apps. It is Distimo, which on April 30, 2010, reported that of all iPhone App Store applications, 73% were paid apps and 27% were free apps (obviously the smaller number of free apps get far larger numbers of downloads, that makes sense). This is consistent with an earlier number I saw from Nov 2009 by Pinch Media, which reported 77% of apps were paid and 27% were free. So lets use the latest, Distimo number. 73% of all iPhone apps are paid. Apple tells us currently there are 225,000 apps in total. 73% of that is 164,250 apps. So the best case of how few apps get to divide that 1.43 Billion dollars over the past 2 years, is 164,000 actual apps (I say best case, because there have been many successful apps that have earned money but have been booted out from the App Store, such as some soft porn/bikini picture apps etc).

1.43 Billion dollars divided among 164,000 actual paid apps gives the average app the revenue of $8,700. After Apple takes its 30% or $2,600 we are left with $6,100. That was over a two year period, so an average paid iPhone app earned six grand to its developers, ie in one year, they earned $3,050. This is the average, remember, it is not the median. The average skews too high because of the long tail. There are a few who make several millions, who distort the average number, so it is not true that half of iPhone App Developers earn more, and half less, than $3,050 per year. It is definitely true, that the median will be significantly less than this. (We will explore that number later, but need more data for it).

But the picture starts out bleak. The average developer gets to pocket a mere $3,050 per year, and this is still considered 'above typically successful', and the most typical developer earns less than that per year. Now the picture starts to get worse. Tighten your seat belts..

AVERAGE PRICE PAID

So we then want the price of how much the average downloaded paid app actually cost to the end-user. What is the average price paid. We know its more than 99 cents, because we know 99 cents is the floor price and we know there are paid apps that sell for more than 99 cents. But how much more. Partial answer comes from a ceiling number, we know the mathematical average price of all prices - not counting the number of downloads (a 99 cent app will be downloaded typically more often than a $9.99 app which will be downloaded more than a $99.99 app etc..). The average of all list prices was according to $3.83 according to Distimo in April 30, 2010. Our number needs to be between these two extremes, 99 cents and $3.83. And we have two sources who have calculated the actual average downloaded app price, and they are remarkably consistent. Chetan Sharma reported in March 2010 that the average paid app price was $1.90. Yankee Group also in March of 2010 reported the average paid app price was $1.99. Lets take their mid point and call it $1.95.

Now we can calculate more valuable data points. The total paid apps earned $1.43 Billion over 2 years. When we divide that by the average price paid of $1.95, we get total paid app downloads of 733 million. In other words, of the total 5 Billion iPhone paid and free app downloads, 733 million - 14.7% - were paid, and obviously the rest, 85.3% of all downloaded iPhone apps were free. That is 4.27 Billion free apps. incidentially a sanity check, in Sept 2009, Yankee Group surveyed actual iPhone App users and found 18% of their apps they had were paid, 82% were free. So the math result of 15% paid apps is quite consistent with other sources.

Now we can attribute the total downloaded apps per installed base of iDevices (iPhones, iPod Touch's and iPads). There were 6.1 million iPhone 2Gs in use at the start point of the iPhone App Store in July, and today we have reached 100 million cumulative sales. So at mid-point there were 53 million iDevices. We can now divide total 5 Billion downloads over the 2 year period, by that average number of devices in use, to get the average number of downloads per user. Which is 94 apps per average device. That splits into 14 paid apps and 80 free apps (over a 2 year period). Or 7 paid apps and 40 free apps downloaded per year per iDevice. Each device generates almost $14 of app revenues per year or nearly $28 over the 2 year period. Naturally for those with 2 of these devices (an iPhone and Touch for example, or two iPhones) then the numbers need to be doubled.

THE MEDIAN ANGLE

So now we know how much each average paid app earned. Now if we have the number of downloads at the median point, we can calculate that number. And yes, there is that number, reported by Supercollider Blog on 2 February 2010. Remember the median has to be less than the average. How bad is bad? Supercollider Blog reports on several levels of paid app downloads, the relevant number is that half of all paid iPhone apps get less than 1,000 downloads. The median point is under 1,000. Lets call it 999. That number times $1.95 per paid app gives the 'most typical app' the total revenues in its lifetime - the full two years of App Store existence - of $1,948 dollars. This is before Apple takes its cut of 30%, so we are left with $1,363 over two years or $682 per year. This is so 'successful' that half of all of the developers of the 164,250 apps - will actually earn LESS THAN THIS. Before you start to cry, remember, there is that Angry Bird game that had 4 million paid downloads and the Bewelled 2 game with 3 million paid downloads. Thats your math there, they are totally skewing the averages, and you are stuck in the 'long tail' indeed. Half of all developers will earn less than $682 per year. Do you still think this is a good business idea?

IT GETS WORSE

Now the heartbreaking news. Lets factor in our development costs. Again, independent source, the Internet Retailer reported on May 1, 2010, that most apps cost between $25,000 and $50,000 to develop. There is another older source I also found, prMac which on 15 December 2009 reported that typical iPhone apps cost between $15,000 and $50,000 to develop. Lets take the mathematical average of those four extreme points, and we arrive at the typical iPhone App development cost of $35,000. Also, lets assume our developers are very clever, they do not need to do any further development of our App, an update would cost a further $10,000 according to Internet Retailer. I have no data on how many apps are updated, so lets say our app does not need any updating. How long for us to break even?

The development of the typical app cost $35,000 and the median paid app earns $682 dollars per year after Apple took its cut. You see where this is going.. We get to break even on our App Development costs in... 51 years. I'd say the iPhone battery will need replacing before then, and perhaps our grand kids have grown tired with that oldfashioned antique toy by then. But maybe - just maybe - without any updates to our app, we can sustain 51 years of continuous sales and recover our initial investment. Yeah, and this is obviously without covering any of our marketing costs, and gives us no profit yet, etc...  Just to break even.

If you take that absolute lowest end of the two estimates, $15,000 and do our app 'dirt cheap' - even then, it will take 22 years to recover our costs. 22 years? I bet AT&T's 3G cellular license doesn't run all the way to 2032 haha. And again, HALF of all developers of paid apps will do worse than this! Can you understand why I preach to the industry, yes, there is money in mobile but for heaven's sake, please do not invest your precious creativity on any smartphone apps today. Its utterly a fool's errand.

PLAYING A GAME

So, most paid iPhone apps are games and some games can have 'huge' success, eh? Like the afore mentioned Angry Bird, the best-selling iPhone paid game app of all time with 4 million downloads at 99 cents ie earning 4 million (before Apple's cut) and the previous champion, Bewelled 2, which had 3 million paid game downloads. You think that justifies your mission? That these numbers are 'impressive' for a mobile phone game? Sure. But I have some friends over there at Artificial Life here in Hong Kong, whose main business is in mobile, but not in making games for phones (they do TV-interactivity as their main business). They had a clever little game a few years ago, you might have heard of it, won many awards, called 'V-Girl' the virtual girl friend on the phone, in the form of an avatar. Like an adult age 'tamagotchi'. These guys are not EA or any major game developer and this was not their main focus. They celebrated their 4 million paid download milestone - back in 2008. 4 million is nothing in the real world of mobile paid data services and apps. Nothing.

Take Tetris. Tetris sold 35 million game cartridges to the Nintendo Gameboy platform. Pretty decent numbers for a gaming platform. Guess how many paid downloads to mobile? Over 100 million. One Hundred Million. Paid game downloads (on Java obviously, not smartphones). And this is nothing in mobile. Nothing! Our numbers are huge. I want huge numbers. That - 100 million in Tetris - is nothing.

What I have been telling my readers and followers and this blog and in my books, that the real money is in true mass market services like SMS, MMS and WAP. That is where the REAL money is. Lets take a game, add known branding, add a media twist, and do it on mobile the way I want to do it. Take Who Wants to be a Millionaire. No, lets go with Pop Idol. The Idols format way back in 2006, ran in 29 countries (American Idol, Indian Idol, Australian Idol, Neuvelle Star in France, Deutschland Sucht Der Superstar in Germany etc). SMLXL wrote a white paper on what they did in mobile-TV convergence. They had a cumulative global TV audience that year in 29 countries of 721 million. And they generated over 420 million dollars in TV voting via SMS. This was in 29 countries in 2006. Today the Pop Idol format has a far larger audience. The 2009 run of American Idol, in the USA alone, earned half a Billion dollars out of SMS voting. THIS is what I mean by where is the money (in gaming, in branded mobile consumer gaming experiences). That is Idol in just one country. Now go multiply that by about 50 countries of Idol this year and you get my vibe....  iPhone Apps, shmapps.

FREE APPS

So then what of the free apps, you say? Fine. There is of course good reason to consider a cool, sexy iPhone oriented advertisement-app (adver-app) or sponsored app. The iPhone is superbly desirable and its screen is large and easy to show to friends, it is far better as an advertising 'platform' than older smaller screen phones, whether smartphones or dumbphones. Sure.

But now we have to go to a different economics. The economics of mass market advertising, while using a smartphone as a mass market media device (something I know a bit about, I've written three books on the topic and lecture on it at Oxford University). Now we have to start with reach. The total active user base of all iDevices is not 100 million as is proudly claimed by Apple and its loyalists. Remember, Apple is quite clear, that 100 million number is cumulative sales. It includes many early iPhone 2G devices that have long since been retired from use. The real installed base is by definition less than the cumulative shipments, for any device like a mobile phone that has on average an 18 month replacement cycle (says the Semiconductor Industry Association). Absolutely definitely the total installed base of iDevices is less than 100 million. How much less, we don't exactly know. We can safely assume all 2 million iPads are in active use haha, but yes, iPhones? As of June of 2009, according to AT&T numbers, there were only 75% of all originally activated iPhones in use on the network. So a year ago the proportion was 75%. Today it is certainly less than that. It should be somewhere in the 65% range in June 2010. But that is for iPhones. I do not have replacement cycles for portable media players or PDAs similar to the iPod Touch. I think its safe to assume iPod Touch's will have longer replacement cycles than iPhones, because iPhones get often subsidised pushing the replacement cycle shorter. What is a fair number for iDevices? 75% or 80% in use? Lets play safe, call it 80%.

So worldwide there are 80 million iPhone compatible devices today in use. That seems like a big number. Except, that compared to just the installed base of smartphones at the end of 2009, it is 13%. So if you do any kind of free iPhone app, and intend it to be a mass market media vehicle to reach the pockets of the total population, you have abandoned 87% of all smartphone users in the world today. That seems like a poor idea to me. But wait, there are more phones than smartphones.

The world has actually 'featurephones' which do apps fully well, using Java and Brew and Widgets etc. How many of those are out there in the wild? Try 2.1 Billion. So that moron who approved the 'brilliant' marketing idea to develop a cool app, and did it only for the iPhone eco-system, conveniently spat in the faces of 96% of the population with reasonably advanced phones - that all could have easily taken that free app, and engaged with your brand, through a mobile phone app. 96% were rejected by this idiotic exclusion strategy by the Apple fan-boys from the marketing department who never bothered to study the real mobile market.

Wait, we have even more interactive devices in our pockets. Are you really sure that wonderful digital media advertising experience could not be delivered via a web service? Or perhaps a variant of it via a web service? Even if only a simpler version of the experience on the app. If its your catalog or a discount coupon or 'nearest store finder' etc - surely that can be done also via a web page? How many phones have a 'real' web browser, yes using HTML. That is 2.8 Billion phones. If you ignore these and limit your marketing campaign to iDevices - you are now abandoning 97% of an addressable market. Is this truly prudent use of your marketing, branding, advertising and creative effort? Wait, I can go on, there is WAP, MMS and SMS....

But you get my picture. Take Hilton Hotels (the idiots). They developed an iPhone app to help busy travellers book their room service meal. An iPhone app to book a meal? And now limited to 3% of prospective clients? Why was this not done via a mobile Web (HTML) or WAP site? Is it somehow impossible to book room service meal on an interactive mobile website? Darn! Or take Walgreen the US drug store (the idiots). Their 'mobile strategy' was an iPhone app pleasing 3% of their customers and ignoring 97% while rival Rite Aid drug store did the SMS based loyalty card, prescription renewals etc and reached the pockets of 100% of Americans. Which is the smart move, which is the moronic move? And thats before we factor in the cost. The iPhone App still costs typically $35,000 to develop. You know what a mobile web site development costs on WAP or Web? Try one tenth of that cost - $3,000 according to that same source I used earlier, Internet Retailer, on May 1, 2010.

So, your development costs are 10 times bigger, your audience reach is 50 times worse. And this makes sense as an 'advertising platform' exactly how?

Again, there is nothing wrong with adver-apps. Adver-apps can be exciting, clever, fun, magical. Nothing wrong with a mobile app developed for a given smartphone platform to drive traffic from there to your site or to create branded experiences for your consumers. But then, you have to start with some sense of reason. The first thing you do, is cover the obvious mass market approaches. Do at least one of SMS, MMS or WAP. Then if you want to be more 'engaging' then yes, you can add Java or Web or Widgets or whatever, but still something that reaches more than half of all phones. After you have those bases covered - THEN do your free app for the iPhone. No problem. Mastercard did it the right way. They first did the basics, SMS and WAP based basic credit card support systems from balance alerts to ATM/cash machine finders etc. Then they added a smartphone app for the predominant smartphone platforms - in the USA obviously starting with the Blackberry first, before the iPhone.

Today if you decide to develop a free app, you pay your $35,000 development cost, then you find your free app competing against just a modest set of 60,750 rival free apps on the iPhone. Imagine if you are your consumer, scrolling past that set, to find you. If the consumer just spends 2 seconds per app considering it, that would take 34 hours to check out the whole range of free apps - to hopefully find yours. Does this make ANY sense? And we already know that the consumer has ALREADY downloaded just a modest amount of... 80 ..eighty.. eight-zero... 80.....free apps to the iDevice before today, to offer your free clever adver-app some rival competition. You really gotta be good to stand out in that context. That $35,000 dollars is probably not enough even for your first edition, and you may well need several updates at $10,000 a pop just to be noticed by your target audience. Who wants this headache in the 'cool, its a free app' nonsense.

The free apps hysteria is totally a repeat of the previous tech bubble, the dot-com bust of year 2000-2001. Suspending all market realism, believing that magical billion download numbers of free content somehow have created an alternate economy where normal rules do not apply. No. If you do advertising, then you measure it by advertising metrics and apply that business logic. Then you value a wider reaching (multi-media interactive platform) ahead of the narrow reaching one of similar performance. Yes, if you really invented a cool game that uses the motion sensors that only the iPhone has, or really need the GPS pinpoint positioning, etc, fine, do your iPhone App. But for most marketing, advertising, branding uses - remember Walgreens vs Rite Aid - the smart move is to start with SMS, MMS, WAP, and adding Java, Web, etc long before you even consider smartphone apps. And when you do apps, then remember which platforms rule. In North America its the Blackberry, in the rest of the world its Symbian (mostly Nokia) far before you even contemplate an iPhone app. But yes, if your VP of Marketing loves his iPhone, do create a cool sexy prototype for him to play with his toy, that is what the iPhone is truly great for - it is the world's fave pocket gaming platform - has more devices than the PSP and obviously most paid and most free apps are ... games.

That was my big blog on the economics of the App Store. It is currently in hype mode, it is a bubble where most developers will not recoup their costs, and in the case of paid apps, will for the vast majority, never reach desired usage levels, and for free apps, will never achieve reasonable reach. Doing advertising that is iPhone specific is like doing TV ads that only work on Sony branded TV sets - except that Sony has a far better global market share than iDevices. (and iPads, at 2 million installed base, don't even mention it.)

And to be very clear, Apple re-vitalized the consumer-oriented app store opportunity where exiting apps store were almost dead at the time, like Nokia's N-Gage gaming apps store. (The other smartphone apps opportunity that I did not discuss in this blog is the business/enterprise apps which are worth about 4 Billion dollars annually, far bigger than all apps stores combined). Everything written here, on both paid and free consumer apps, applies also to Nokia Ovi, Google Android, Microsoft etc app stores. Today this industry is in over-hype mode as to apps, and most app developers will make losses - but not all app developers. Some will be lucky. In the future a stable viable business will emerge out of this, and we can thank Apple for revitalizing this opportunity. But don't invest in it today.. Put your creativity and investment into the real money opportunities, remember Pop Idol simple SMS votes earning half a billion dollars in USA this year alone...

All stats in this blog that were not expressly quoted for a specific source, are from the TomiAhonen Almanac 2010. You may freely quote any facts and analysis from this blog and make your own shorter edited versions of it. GigaOm has already kindly done so (thanks!).

PERHAPS? - if you the reader feel 'I wish someone had told me this a while ago, before all that effort' then you might want to stop by this blog, not one of the many where I have been warning of this growing hype around apps, but rather, my advice from last year, on where the real money is in mobile. There is more than $250 billion dollars this year in mobile data services to be made - you could be part of that. You might want to read this guide to the digital Klondyke, the mobile Eldorado.

BONUS - I have just finished my latest free 'Thought Piece' which is a 2 page unrestricted pdf file - yes, my blogs are long and tedious, but at least the book and Thought Pieces are edited haha.. - anyway, this latest Thought Piece is on 'Investor Advice' to mobile, helping navigate the pitfalls and find the good opportunities today. If you'd like a free copy, just send me an email to tomi (at) tomiahonen (dot) com and I will send you the Thought Piece by return email.

Comments

[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: [email protected]

[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.