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« Smartphone wars update mid June: iPhone 4 sales stumbles, Nokia profit warning, Microsoft OS confusion | Main | US vs Them? American wireless industry, come meet me at Camera 3 »

June 22, 2010

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

The comments to this entry are closed.

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