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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

Mark Hirsch

Thanks for the thoughtful analysis.

I see many similarities to this and the software game business.

One thing I think you can add to your analysis is the "lottery" approach, or "killer app" strategy. Many developers I believe are not worrying about the averages, but rather trying to just shoot to be one of the top grossing apps, or blockbuster apps.

Not good for everyone, but this approach can also make sense if you really have something innovative and want to use this platform to earn revenues/profits.

Stuart

Very interesting piece -- thanks.

In an ideal world, would be great if any app that had sold less than say 10 copies in the last month was removed from the above calculations. At least in travel (and I'm sure this is the case in other areas) the Appstore is awash in rubbish apps sold for $0.99. Nobody in their right mind would buy them. While they won't be contributing to the revenue figures quoted above they do inflate the number of apps.

Also agree with other comments that your estimate of the cost of building a quality app is overly high - we've ten quality apps in the store and our costs were significantly lower than what you suggest.

From a developer POV the two biggest points of frustration are the (mentioned above) "garbage apps" that clutter the store, and, the store itself.

Nothing in the form of analytics from the store. For example there is little way to decipher bounce rates off your landing page in the store - what copy works? The Apple system for Features/what's hot etc is nebulous and mysterious (we recently had three apps on the front page of Travel in the Australian store, yet sales were through the floor!)

While all this is frustrating, at least we're "starting at a low point" and one would hope that over time the AppStore and associated analytics will improve and we'll start seeing higher earnings for more developers.

Joshua Hedlund

I like your thinking and analysis - I haven't thought of the App Store as a bubble before but it makes sense - but I think your analysis in incomplete.

In addition to points made by others above regarding median development costs or creating multiple apps with overlapping development costs, have you considered a growing user size? In all of your analysis over 2 years of data I was surprised that you did not compare the first year to the second year... did numbers go up and by how much? Why extrapolate to ROIs of 22 years if the user base is increasing?

Jim Preston

We developed an iPhone wine travel app, Winery Quest Pro, for a few thousand dollars of programmer's time (Ukraine) and my time. This is for business and my time is valuable. My time was spent designing the app features and UI and endless testing, and then marketing. My guess is our app with some 5 upgrades since last August cost roughly $10K USD in time and money.

We started tinkering with development in January 2009 and entered the iPhone App Store July 30, 2009. Neither I nor the programmer ever worked with an Apple product before that. (I started working in app dev in 1981.)

Marketing consists mostly of Adwords. I've sunk a LOT of time into this.

Our market, mostly Californians who travel to our many wine regions, have iPhones. We see them everywhere during our field work. They overwhelmingly search with Google. We address a well established need with up to date winery information and accurate locations in the maps.

We now have many competitors but Winery Quest is by far the leader in features.

Since last September I've run dozens of tests on landing page design, Adwords content, and pricing. I use Google Analytics but without decent metrics from the App Store I'm flying blind. Apple is aware of this problem, no shopping cart type information, but so far hasn't addressed it. This REALLY HURTS app marketing.

Some tests worked and some didn't. We are adding a video about the app in use to our landing page and YouTube soon and we'll see what happens.

I know of no other wine travel app that is being marketed as extensively.

With Adwords we are breaking even on some 650 apps sold. We made a nice profit for the first month in the App Store but nothing since then. We are hugely in the hole for development costs. But that isn't the whole story.

My Adwords budget is usually $5/day. My click through rate is a big 10%. Per Google's advice I could get vastly more clicks with a bigger budget. If I ramp up my successful experiments we would do very well.

However, I'm too curious and don't accept the status quo. I keep trying new ideas. Fortunately I have a patient wife who will live with tight budgets for a long time. (Key to entrepreneurship. We have several other projects eating money also.)

My advice to developers or those who want someone else to develop their app is to focus on a tight market niche that you know you can reach easily and have an overwhelmingly compelling app. It needs to be 10x better than alternatives. (Venture capitalists look for the same ratio.) You have to have the marketing figured out or don't bother investing. Just having an app in an app store is worthless past the first few weeks.

If you do develop and get into long term marketing then you are probably looking at a year of testing. That will have a huge time cost but may not cost much or anything in money. My worst month was a $30 loss.

While you can rightfully take issues with the above blog post, from what I've seen here in Silicon Valley the vast majority of developers, and a bunch are here, will never recover their time and money investment. They fail for all the usual reasons that businesses fail.


Lastly I'll give you a treat that is very hard to find. Our conversion rate averages 8%. We could be reasonably profitable at that - if I would quit screwing around with different ideas every week :-) I like the days when it is 15% or higher but so far can't find a way to maintain that.

Hope this helps.

http://winequesters.com/iphone/WineryQuest_iPhone_app.php

- Jim Preston
Santa Clara, CA

Robert

Maybe I'm misunderstanding... But it cost me $0 to write my app - free app. And it's on #50 in the financial section. I only invested in some 3rd party reviews, and it already paid off.

Matt Rix

I think there are some big mistakes with your calculations, correct me if I'm wrong:

You take the total amount of money(1.4 billion), and divide it by the number of apps in the store. The big problem is that you assume that all of the apps have been out since the store started! A lot of those 164,000 apps only came out in the second year(or the last few months). That's a huge difference. The second thing, is that there is NO WAY the average app cost is anywhere near $15000 to $50000. For the good apps, sure, but there are RELATIVELY few good apps. The app store is littered with thousands upon thousands of "single serving" apps, like "New York Weather", "Miami Weather", "Michigan Weather", that are all the exact same code base but with different data sources. Surely each of those doesn't cost $15000, but *maybe* the original one did.

Finally, another big problem, similar to that, is that you don't consider the fact that costs for a developer's first app will be much higher than for all their apps after that(if they're writing good, reusable code, which they should be). Development costs will get cheaper and cheaper with each bit of code they write.

Indrajith

Yes, the basic assumption that, an app cost is in the range of $35,000 - $50,000 is not true for many apps. Many apps are by indie developers, who uses their spare time. It is also true, many companies involved in the app development, for them the case is true. But if you are a developer, you can roll out a decent app in 1 - 2 months, which most guys do. If it is a hit, definitely a revenue from the 'cheap' spare time, discounted from the time otherwise spent on the idiot box. The economics cited in the article is not completely correct.

Iresha

225,000Apps x Average Devel Cost $35,000 = $7.9 Billion

Either the numbers don't add up or there's a lot of money in iPhone development

Aaron

Good points worth consideration for any mobile developer. Some flawed assumptions though: lots made in reverse-engineering the statistics, but also some other assumptions like your free app is going to compete with all the other free apps out there. That's not really true... your free app is going to compete with other apps (free or not) that offer similar features.

Take the Amazon iPhone app (disclosure: I work for Amazon, but not in the same dept). There's not really another iPhone app that does the same thing as that, so competitor-size = 0. Of course, that doesn't mean every iPhone owner is going to download the Amazon app, or even that the investment in developing that app paid off (I don't know if it has or not myself). Amazon has a mobile site, so that's not an issue, but the iPhone (and Android) app is much better to use if you can. Would be there a benefit to writing a dedicated Brew app for feature phones? I don't know... depends on how much features you can cram in above the regular mobile site. Another questionable assumption: that all mobile users are alike. Clearly, writing a dedicated iPhone app for ordering food without having a mobile option for others sounds batty; but would a Kindle or Nook app make sense on a feature phone? Probably not. For the minority segment of the market that the iPhone and iPad represent, users on those platforms are much more likely to use your app and buy stuff with it. It's almost like arguing that an auto parts manufacturer should not build parts for Ferraris because there's so few Ferrari drivers out there... yes, but they are probably willing and able to spend a lot more on their car parts than the average Toyota owner.

The lesson, I think, is don't develop the average iPhone app. Like any business, if you want to make money, you've got to do some market research. If you can find a market segment underserved that you think you can profit from, then go for it. If not, then don't.

Girish

A very negative view of things. Let me point out the some errors in your argument:
1. You consider the bikini-soft-porn apps as the average app, but then do you really think it takes 35000$ to create a bikini app??? It takes less than 10$ to create a bikini app. A return of 3500$ on 10$ investment is something.

2. App store is a market. Its not a get-rich-quick scheme. If you have quality and content in your app. If you have a good idea, then you will be successful. Yes foolish people who think making a bikini app will make them millionaires will never get anything out of the app-store.

3. Consider singers. Do you know how many singers there are in the world. and how many actually get rich and famous and release albums. If you consider average, then you would advice everyone to stop singing, stop learning guitar, stop taking acting lessons.
It doesn't work that way.

App store is a market like any other market. If your product is good, if your product offers value to the customer then it will sell. If you make junk it won't.

jedrek

I'm sorry, but are you really saying that the average developer only develops one app?

bobby

Good article. If you are hunting for trendy digital products, quality consumer/car electronics, apple/computers accessories,hobbies&toys&watches,tools etc.. Why not check SunnyGain.com out? You can find many thousands of super discount products you are interested in there! Go to sunnygain now!

@millsustwo

Stating the upmost obvious. We all know that it’s a false economy for lone develoeprs, but big brands see (rightly so) the iPhone platyform as the only platform worth investing in and will continue to do so. THe clever developers use iPhone dev purely as a marketting exercise to attract these brands.

dilling

Just a thought:
It seems to me that the number of downloaded apps would be a prime example of a process governed by zipf's law. Using Zipf's law should make it possible to estimate much more accurately the median download from a few numbers of the most downloaded apps

Ivan

Nice article, however there are important bits of information missing when the author compares Apple's App Store to the Operator / Aggregator distribution channels. It is true that the Java market is vastly more profitable than the App Store, however, 1) the costs also are vastly higher, 2) exposure is a lot harder, 3) targeted marketing is non-existent or limited to TV/magazine Ads.

The Operator / Aggregator market in fact is already saturated and pretty much consolidated already, where you have the big players from the types of Buongiorno and Zed (aggregators) to operators portals (where the real juice is), and of course the 3 monopolies who supply this industry (which by the way is mainly games) Gameloft, EA Mobile and Glu Mobile.

So if you want to enter the games market you are pretty much competing with these three behemoths for the top 10 spots available at the operators' portals. In other words you have pretty much zero chance. You are better off to offer your product to these publishers and hope they'll pick it up (which is also practically a zero change these days.)

If this is not enough, take a look at the cost of development for this market. You pretty much have to support over 400 handsets, QA them (thus you need to have them or pay third parties for QA). The costs involved are vastly superior to the development costs of an iPhone app, in orders of magnitude. Of course I am not counting the cost of the know-how.

Also I am not taking into account the costs of development for Symbian, Windows ME, etc. Many portals today require you to support certain non-Java devices, if not they will not carry your title. So chip in the dev cost for all these platforms as well with their QA costs included. Also remember that QA here means that the game has been tested on the real device. There are no fancy emulators like the iPhone Simulator.

On the other hand in the iPhone industry you do have far lower cost, you can place yourself on the App Store with practically no cost and effort. Now if you have a product which people won't even buy for 0.99$ or you have not even thought about proper marketing (with a proper budget) obviously you have nothing to do here as well. Being the big guys you do not need much marketing in the Java ecosystem, this is because all the marketing has already been done, people will buy their games because 1) they are usually licensed games (typically movies), 2) customers already know Gameloft, EA and Glu Mobile. On top they do carry some marketing campaigns every once in a while.

In the remote case that an unknown developer covers all the production costs and manages to have the right contacts (good luck with that) and enters this market, with a great game, the dev would need to do a pretty big budget in TV ads and whatnot.

So even though the market numbers are correct in the article, the reality on the ground is much worse for the non-App Store markets for a new developer than for the iPhone. In the iPhone market the developer is at least given a chance, where as in the operator world you would be lucky if a content manager of an operator would even bother to reply to your email or talk to you on the phone (first baby step so he or she puts your game on the portal). Oh and this is only for one operator in one country. You'd have to do this with all the operators for all the countries you are targeting.

So to conclude, the iPhone App Store is not a pretty picture in reality? Sure. But the other "Real Money" market is practically a forget-it issue for new devs.

Tomasz Kolinko

I like your analysis. The best one I've seen on the subject yet and far better then the hyped out info-graphic.

But there are some things that I have to disagree with:
- App development is not $35.000. The average and median cost is far far less:
* Many of the developers are hobbyists or freelancers. Even measuring their time as a cost it could give live $1000-$2000 on average cost per one amateur app (a bulk of freelancers live in poorer countries)
* Similarly many apps are done in poorer countries by freelancers. Their cost can still be in range of $1000-$4000
* Many apps are just variants of another ones
- You assume that one developer does one app only ("The average developer gets to pocket a mere $3,050 per year"). That is totally off.
- You forget that in case of SMS market the cost of promotion and development is substantially higher. If you want to develop an application on Symbian / Java you have to spend a lot of time on testing etc. I would never try doing a Symbian / Java app by myself. I didn't hear about any application that was done by one or two developers that got any success on the older platforms you mentioned.
- You gave only a number of devices that are able to render HTML - that number is useless. What is meaningful is the number of devices that render HTML and have mobile data plans, or even better - the number of devices that render HTML and that are actually being used to browse the web. Only in Android & iPhone those numbers are similar. On the older devices I'd say that the second number is much, much lower (like 10-20%?)

Ashley

Lame and your math is sketchy at best.

aishwarya

developers must combine something like Google Firefox duo which can actually help them recover most part of their costs

james

This is the economics of many creative business's. Take writing a book, something which I have tried doing on multiple occasions. The likelihood that you'll make money at it is next to nil. Of course, there are differences between the publishing and app-store model, namely that but for the few the books that acheive critical success, publishers lose money on nearly every other project. But on the development side the principles carry over. How many movies recoup costs? Very few. Music bands? Again, very few. I would venture to say that app-creation is now more of a creative pursuit than a business--others would disagree, but I think your numbers justify that assessment. I think it's clear that Apple has to try to make it so development costs go down.

Mike Lee

Tomi -

It would be interesting to see how this compares to iPad apps a couple of years from now. Any thoughts on this?

I am currently exploring building out a mobile solution for our destination site and my thoughts on building an iPad app haven't been because we could make a lot of money via downloads, but rather because evidence suggests iPads, ereaders, etc., are where people will be consuming the web in higher numbers.

Your information is exactly why we have skipped building an iPhone app and are instead looking to build an iPad app or at least a rich viewable experience on an iPad. From where I sit in technology, I've seen the same things you mention in this article. Truly the only reason I can see building a specific iPhone/iPad app is because of the iTunes / App store Eco-system.

Would enjoy your thoughts on the above in a future post.

The comments to this entry are closed.

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