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

[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.

[Iain]

Android Market payouts 2% of App store - http://bit.ly/9xrZrn

How do Ovi Store sales/payouts stack up?

[Tomi T Ahonen]

I will respond to comments in small sets, as I will answer each person individually. I'll start with the first 5 here

Hi Henry, Michael, sami, Chris, Maggan

Henry - thanks! And yeah, its still somewhat a clumsy process but also clearly all the thanks to Apple for making it FAR easier than it was before whether on Blackberry or Windows Mobile or Symbian/N-Gage/Club Nokia etc (before Ovi). Now at least all app stores are compared to Apple and try to improve. Its good for the overall community haha.

Michael - thanks!

sami - no, I wish I knew, and perhaps this blog and similar blogs recently and the attention like GigaOm reporting on this etc, will help some analyst houses to go and research it. I would love to find that number, as the median is again far more relevant than average. But that one analyst I quoted for the average develepment cost of between $25K and $50K was very specific stating that 'most' apps fell in this group, so the median should sit between $25K and $50K. Do remember that there is not much competent developing ability in this space, far less than say HTML development or Java etc, so for random companies - the Hilton Hotel example - when their CEO suddenly has the 'idea' that they need an iPhone app, then where do they go? Their nearest digital agency down the road will probably not have this skill in their office, and then going to their global pool (on the West Coast no doubt) and asking this 'rush job' to be coded, can easily pile on tons of extra costs. Plus that $10,000 cost to do upgrades. I noticed that the bestselling game, what was that bird game, had had at least 6 updates since December 2009 haha. Thats $10K each time..

Chris - totally completely agree with you. Yes, iPhone app can be great resume/CV builder, and hobbyist can do it for fun and won't care of the exact costs involved. But for serious 'professional' use, in most cases, has to be secondary or later platform. And yes, in some demnographics can still be relevant, even in its modest reach. The Wall Street Journal newspaper won't reach 3% of Americans in its circulation yet it gets ads that are custom to the WSJ (ie ads that don't run on NY Times or USA Today etc). Good points, totally agree.

Maggan - thanks and very valid points. I totally agree, we need now MORE analysi. I never said 'all' iPhone App Store projects are doomed and that nobody will ever make money and I am very optimistic of it in the longer run. My point is to show with real numbers (now that we finally have them from Apple directly) that the reported hyped numbers from last year, 10 billion dollar opportunity etc - is totally bogus. I want developers to come in with their eyes wide open, not blinded by 5 billion downloads haha.

But yes, what you ask for, so do I. I am hoping we will soon get more info on this and can expand the knowledge. I want all those points, what is the value of the advertising related to iPhone Apps specifically and to all smartphone apps overall. I hope we'll have that later this year if I know the analysts of this industry haha, hopefully several have such research already under way. You can be sure I'll blog about those numbers when we get them. but as an ad platform, and a marketing communications, branding, and sponsored content platform, again, the 80 million installed base is TRIVIAL for almost all mass market brands. Like idiots Hilton Hotels or Walgreens pharamcy etc. Utterly stupid. If they first handled the mass market of their clients were 95% of their customers are - on WAP or SMS or MMS, after that they can do an app. And idf you want a prescriptions reminder (Walgreen) or to order room service food (Hilton) come on, that 'digital agency' who sold the idea to do an iPhone App deserves to be lynched in public. These giant companies should have done those on WAP and SMS. They are ridiculous...

Like I so often like to repeat that Maslow quote, if the only tool you know is a hammer, you tend to see every problem as a nail. The big problem in the mobile data industry is how many newcomers to the industry only know of the iPhone App and seem to force it to solve any problem (room service, come on)

Thank you all for writing, I will do more replies soon, please keep the comments coming. Also note, I added a couple of bonus items to the bottom of the blog article including a freebie..

Tomi Ahonen :-)

[Justin Tormey]

Personally I'm not a huge fan of multiplying or dividing large ambiguous numbers with other large speculative numbers to prove any business plans. Clearly someone is making money here.

Through use of the same logical sequence he's presented here one could assume that having a website would also be equally unprofitable and therefore not worth your time. That is, if you divide the total number of websites that exist in the internets and divide it by the billions of dollars made off of them. I'm sure the same calculations would lead us to believe that the "average" website earns just $1.25/year.

He also fails to take into account using mobile apps as part of a larger business model. If selling a single app is your only business, you don't have much of a business. I don't think we needed him to tell us that. But if mobile apps are part of a larger offering, or one tenant of a multi-media business, then he's shown us you can at least break-even on the cost of the app. Plus you get the marketing perks that come with having a blingy iPhone / iPad app.

[Hillshire]

Sorry Tomi but you're building a house of cards to support your own preference. Your primary contention seems to be that writing apps is a bad path to follow, web services are better. And you are correct in various cases. But much of your data is based on a weak premise.

You cite Internet Retailer as the source for your data point that apps cost $15,000 to $50,000 to develop and conveniently decide that the average cost is $35,000. I went to their website and read various articles on app costs and development finally finding one stating app costs can be anywhere from $10,000 to $50,000. The $10,000 vs $15,000 is unimportant and irrelevant. What is important and relevant is "can be". Not "is". In other words, each app is as expensive to develop as the coder is willing to invest time and resources on.

Let me drive this home. You are stating high costs of development when there is no data stating that a b and c apps were written for x y and z costs resulting in j k and l returns. That kind of hard data would be useful (although, only if it were comprehensive enough to cover pretty much all sales). But generalizing $35,000 (or any number, really) based on a generalized "can be" $10,000 or $15,000 to $50,000 to create any general premise, positive or negative, as to whether or not to write apps just seems like you are trying to create a perception or conclusion, not discover one.

Perhaps I am being too simplistic but it seems clear to me that a well written app which fulfills the needs of the user has the best chance of success. Writing that app can be as expensive or cheap as the complexity of executing the idea effectively. Conversely, a poorly written app or useless app is unlikely to make money. In other words, I think most coders are smart enough to weigh the quality of their idea and cost to create it vs the returns they may gain. Your recent articles give the impression that you are massaging the data towards your own conclusions.

Hopefully I am not coming across as giving a personal attack. You are clearly very bright and capable. I have great respect for you. But I fundamentally disagree on several points in your recent articles and honestly, it's been bugging me. Sorry.

You have inspired me to keep closer tabs on Nokia though. I am going to add them to my stock list to track. As a third generation full blood, I want Nokia to do well and bring continued success to Suomi.

[Chris]

Interesting article, but I must take issue with a few of your calculations.

First of all, you calculate the average revenue per year per paid app by dividing total revenue by total paid apps, then dividing by year. This would be accurate if all apps were released at the same time when the App store launched, but this is not the case. You'd have to wait an additional two years to see what is the average revenue for apps on the market today based on a two-year lifespan.

Second, after calculating average revenue per app as $3050, you say that "The average developer gets to pocket a mere $3,050 per year" - this assumes that the average developer releases one app per two years, which I'm quite sure is too low.

Also, saying that an iPhone app costs between $15,000 and $50,000 to develop, then comparing it against "average" numbers, is misleading at best.

Imagine if you took a figure that a website costs between $15,000 and $50,000 to develop (a very conservative number, if you're talking about a professional design companies that service corporations) and then say that the average website makes a thousand dollars or so (including everything from sites like Amazon and Google, to sites like- well, like this blog.)

You'd come out with figures proving that "websites are disastrous investments to make, and, again, that result would be misleading at best.

[Tomi T Ahonen]

Second set of replies, to comments 6 - 10

Hi Romain, Baldur, Roger, developer and Daniel

Romain - welcome back and good comments as always. On the web vs app, I do think its a valid comparison, one because both are potentially available to every developer considering an app (the opposite not true, obviously) and secondly, because now the math is obvious, there is nothing like a 1 in 10 success chance in apps - that ratio has been stated in public many times for mobile web developers. By these numbers were looking at something like 1 in 1,000 chance to make money in apps. Hideously worse. Note that for example in the movies business and music business, the rule of thumb is the same, 1 in 10 make profits. So the mobile web is in line with that, but now Apps are exposed for utter futility.. I think this blog needed to be told, don't you agree? Then the 'brave' developer who really wants to take on those odds, can go and do it if they KNOW that its 100 times worse than in music or movies or mobile web.

I didn't compare standard apps to Idols. I compared the ultimate best-selling game of the App Store to one popular gaming format on mobile. I have tons of these examples as you know. Mobile gaming earns more than 10 Billion dollars all by itself and for example EA CEO just said that the stongest growth, biggest profits and the future of all videogaming is mobile gaming.

On Hilton. So I used the iDevice population which included Touch (and iPad). Most Touch's are with youth who can't afford the monthly fee of iPhones. So the iPhone population - the only device ABLE to provide room service via its 3G connectivity is the iPhone. So iPhone penetration far below the number for all iDevices. And who travels? Its the business traveller - the proverbial Blackberry road warrier (I can attest to that, am in planes many times every week, and all landings, its Blackberries galore, not iPhones). Of COURSE any smart hotel manager starts with Blackberries and for the foreign tourists - the Symbian phones long before they do iPhones. Idiots at Hilton Hotels. Utter total incompetent idiots. To do room service ordering? That could be done on WAP and work on 95% of all phones, and specifically EVERY brand of smartphone. Idiots.

On your last point, independent music etc - answered it in the above. Music chances 1 in 10. Apps 1 in 1,000. You make the call haha..

Baldur - good points and yes, I do agree with you, we'll see the iPhone App Store evolve very much like Mac PC application market, a small niche, with loyal customers and very peculiar devices that break with the norm. They will no doubt cater to the advertising and media industries (like Macs). But I do think these numbers need to be told, so the run-of-the-mill CEO of some mid sized company won't be fooled into thinking they'll be in every pocket if they do that magical iPhone app. Don't you agree?

Roger - fine. That can happen and you can also win in the lottery eh, haha. But the odds are HORRIBLY long against that kind of success. Like I wrote in this reply to Romain here above, not the usual 1 in 10, but more like 1 in 1,000. That is horrendous odds stacked against you. But of course some will be on the Top 10 or Top 25 chart and make their millions, some certainly will.

developer - very good to have helped. Thanks.

Daniel - thanks for coming back, and thank you VERY MUCH for the kind words. With feedback like that, it makes it worthwhile me to continue to write this blog late at night, wondering if anyone even reads it anymore haha...

I will return with more comments. Please keep writing.

Tomi Ahonen :-)

[Jody]

@Maggan

Nice comment, "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?)"

Actually this is one major factor how Apple can trumpet their 200 000 plus apps. Somewhere in the order of 30% of those "apps" are simple ebooks, and most of those are produced by wrapping the text in exactly the same runtime app as used for many others. There is something like 280 versions of Jane Eyre in Apples app store. Just how many copies of that does one need?

Add to that all of the single subject "rss readers" and you can account for a huge fraction of the "apps".

So anyone chasing that number of apps is chasing a ghost. I can see that Nokia has learned the lesson well because they now offer a web based "create your own app" that generates a single subject rss reader...

[One Lucky App Developer]

I think your analysis is flawed due to a bad assumption. The assumption being that all apps and all developers deserve money. To calculate the average and median income you used all of the apps in the app store.

Example:
There is an "English Hungarian Translator with Voice" application. All it does is call translate.google.com to translate
english text to hungarian. You can verify that this application gets the same answer as google every time. I bought it and tried it.
http://itunes.apple.com/us/app/english-hungarian-translator/id372154973?mt=8

This software has zero value as people could just browse to translate.google.com on the iPad. To make matters worse the developer created a different app for every language that google supports. It's something like 40 different apps.

This developer also created apps like "Restautant Nearby", "Museum Nearby"...etc.
http://itunes.apple.com/us/app/restaurant-nearby/id332582271?mt=8

You can probably guess what these apps do, and you can probably guess how much effort it takes to create these apps once you finished one of them. This one guy alone is responsible for 100+ apps. Should these really be counted as separate apps? Does this developer deserve any money? I won't feel bad for him when he fails.

To make matters worse this is just one of the many app spammers. We simply can not count these apps because they throw the average off just like the Angry Birds or Doodle Jump apps.

I bet if you don't count the spammers, the low quality apps, horrible ebooks...etc, you'll arrive at a much smaller count for good apps. Using that number will give you a much more optimistic result. I personally made over $100K with an app that I consider good, but not great. I built it in my spare time, so my development costs were under $7K, and that's exactly how I claimed it on my tax return.

Let me know if you disagree, but I really don't think it's fair to include all of the spam in the store.

[One Lucky App Developer]

I was too quick to post and missed Maggan's comment, which pretty much says the same thing I did. I think articles like this one are just as flawed as the "get rich quick" stories we read about.

You can made decent money on the app store with a quality product. It's a lot of work, it's not easy, and luck is involved. How is that different than anything else? You could say the same about opening a restaurant or any other business.

[Tomi T Ahonen]

Another set of 5 replies

Hi Colm, LG, Brad, Chris, Alexander

Colm - Congrats on your app. I'm very happy you've been so highly rated and obviously are making (modest) returns. Hoping the FIFA tournament will help keep driving more gamers to your app. And thank you for validating my main points. I think its alarming to have a top rated game developer who still struggles to make money... Cheers and good luck and please come back to our blog later - or write to me privately if you want - and lets talk more about your experiences and how you see your next steps. I trust you've discovered Forum Oxford and have joined as a member (its free of course). William Volk there is our resident App Store guru who will no doubt be happy to share his scars and successes haha..

LG - I totally agree with you. That is 100% accurate for the music biz, for hollywood, for any 'hits' industry where roughly speaking the '1 in 10 wins' rule of thumb applies. Some thought that applies to iPhone Apps. We now know that to be a myth. The odds are near astronomical in apps, at least 1 in 1,000. The rules are NOT the same here. If you want 'easy' odds of 1 in 10, go do MMS or SMS or WAP mobile SERVICES, not apps. There the odds are roughly 1 in 10. Check out Flirtomatic for example, award-winning WAP based social network on 3 continents, couple of million super-satisfied users, the service is hideously profitable and just won last night again an international award, a MEFFY for best mobile social network (third year in a row). That is hits biz in WAP. That is possible. In apps you gotta be suicidal to accept the 1 in 1,000 odds. But up to now, the facts were not out there - and obviously Apple had no interest in bursting this bubble, they have ridden the App Store hype for 2 years now, as the iPhone upgrades have not been as radical as the first upgrade was in 2008...

Brad - great example, the stylists' service. But again - didn't you notice that with it, you limit yourself to those stylists and salon owners who have an iPhone? Why not do your stylist app with Java, then you're covering most stylists who have at least feature phones, and your app can have far wider adoption? An iPhone version then is no problem in the mix, but my advice is to at least examine what you inteded to do, if Java isn't the best way to reach all stylists.. There is a clever Japanese stylist service "My Hairstyling" which I think is on Brew.

Chris - I agree, all (other app stores) should copy the iPhone App Store regardless, because Apple has executed it generally the best, and is a perfect place to start, and then try to do even better (which in turn propels Apple to do even better). But on 'is there ecosystem with more revenues' haha. Yes. Tons. The apps space itself last year, when Apple App Store generated $686v million - was worth over 5 BILLION. How is that possible? Its enterprise/business oriented apps, on Blackberry, on Nokia E-Series etc. Did you see, that Nokia generates billions in service revenues (when Apple did 250 million last year)? So yes, if you move away from the sexy glitzy and glorious consumer apps like the fart apps etc, and go 'serious' to enterprise/corporate apps, and do CRM integration with SAP and Siebel and IBM and those guys, some serious IT integration work - then yes, there are billions already now to be made. Your app development will haha, be several orders of magnitude more demanding than an iPhone app haha..

Then there is MMS. Try 30 Billion dollars.. Newspapers in China - 40% of their readers pay for daily news headline updates via MMS or SMS. That kind of stuff. MAJOR money in it. Then SMS, premium SMS, WAP etc. Thats where the money is. $250 Billion dollars last year. Probably passing $300 Billion this year. (see Flirtomatic above for great example, its also in the USA by the way)

Alexander - totally true, thanks! Yes, in most of the world, for most phone users, it is a tool. And they will never afford a PC, so if you can do a little email or weather or whatever utility service, often on SMS or even voice (remember the planet has 800 million illiterates still) - then yes, you can make tons of money on very small concepts. Take ringing tones. In countries like the Gambia (average wage under $1 per day) a peasant father in a village may still want to buy a ringing tone costing 2 dollars and save for weeks to afford it. Why? Because its the song of their wedding, the special song for both him and his wife. And the wife also uses the phone. They didn't know the song exists as a 'ringing tone' but the guy hears it one day, and then goes to find it and installs it onto their phone, so he can give a present of music to his wife. This is reality in Africa. And that - it is still a downloaded item of music to the phone. Not to a smartphone, not even to a 'musicphone' and very likely it is a SECOND HAND phone, bought at the local bazaar, long since discarded by some European, but still making good communications for that African farmer..

Thank you all, please keep the discussions going

Tomi Ahonen :-)

[Rahul]

Exceptionally good post. What does this say about the 'app store' being the killer differentiator for Apple? If developers can't make money from apps, there will be fewer of them and thus less need to buy an iPhone which runs in a closed system with those apps.

[Romain Criton]

Hi (again) Tomi,

I don't know whether you calculated your "1 in 1000" odd from the figures quoted in your article, or if it is more of a "guesstimate", but I trust your stats skills and instinct so I won't argue on that number.
However, when comparing this "1 in 1000" odd to the much more favorable "1 in 10" odd commonly accepted in the music/video industry, you have to take into account the very low barrier to entry that exists on the App Store.
Pretty much any one with a thousands bucks and a "learn iphone development" book can make their own app and publish it to the App Store (provided they abide by Apple rules of course). You can even make your own app without any coding skills using "cookie-cutter" tools.
This leads, as pointed out by several other commenters, to a tremendous amount of "crapps" in the App Store and therefore lowers the global odds of making it big.
Sure in the music industry you can still record your song on your PC and then attempt to distribute it on the Web.
Or in the movie industry you can shoot your movie using your cellphone, cast your friends and family and then post a trailer to Youtube.
But you won't have access to the same distribution channels as the big guy, so that's why the barrier to entry is considerably higher in those industries vs. App Store

[totally free iPhone]

Thanks for a really well thought out article. Guess I'll give up my dream of becoming an app developer lol

[Simeon Pashley]

It does make for interesting reading and I think there's a few factors. iPad enables the game authors to have 2 target platforms now, which must broaden their reach and increase sales, maybe not now but in the longer term this should improve as both platforms increase in volume.

I really hope for game developers sake that the prices don't drop too far as people race to the bottom and try and compete on price as it's a one-way trip and dangerous long-term game. Sadly, since the barrier to development is so low we're competing against cheap bedroom developers across the globe so this is always going to be a problem.

Market saturation is also a problem on iPhone, every new game/app is a drop in a massive ocean and it's very difficult to gain awareness to get you promoted to peoples app store lists. It takes concerted effort to make it out of the pool and I know that there's a lot of great games that just get missed. After all, there's a finite number of people buying games and a seemingly infinite choice of games.

So, I think iPad is a great opportunity for devs to make a bit more margin but it's not going to last long. As always, the gold rush will soon run out of gold.

Devs need to think of new ways to make money, 59p isn't too far off 'free' so it needs some thinking on how you're going to make the leap. Godfinger is a good example (which is pretty much Mafia Wars biz model).

I think we can draw parallels with the GB->GBA->DS->DSi->3DS progression too, although the barrier to development is significantly higher than on iPhone.

All in all, new platforms increase our audience, which should increase sales & revenue for little increase in dev costs.

Simeon
w: http://game-linchpin.com
tw: @gamelinchpin

[Jeffrey Kahler]

Look at the Wizzard Media Business model for Podcast Apps: www.wizzard.tv