The False Economy of Apps

Apps are the new black. WIRED (in)famously concluded in September 2009 that the web is dead - all hail the new king: Smartphone apps. Apple’s iOS claims 1,000,000 apps in their iTunes app store. Google recently announced their own Play store reached similar numbers. And even Microsoft, lagging third in the mobile OS wars proudly touts 100,000 apps for their Windows 8 platform.

But is this all good business? Or to be more precise: Is this good business for developers and software companies?

On the surface it looks like it - Apple announced that they paid out more than $5BN to their developers. Sounds like big business. But once you dissect the numbers a bit a different image appears.

The problem has multiple facets: Apps are a strongly hit-driven business; the numbers of users (and thus revenue) drop dramatically when you go beyond the top 100 apps. There are a few winners and lots and lots of losers. Then you have to deal with a market where the average selling price is less than the price of a cup of coffee. It might be okay to sell only 1,000 copies of your app if you make $100 on each copy sold. In the app stores you make somewhere in the $1.50 range. And then you mostly don’t ‘own’ the customer. Usually you have no way to engage with your customer beyond your app. Which means you have little leverage in cross selling other products or services.

This makes for a pretty dire picture all in all. Ben Horowitz from the Silicon Valley VC firm Andreessen Horowitz recently told a group of entrepreneurs that he doesn’t invest into app businesses - as they don’t make enough money and are at the mercy of the respective app store operator.

If you want to dig deeper into the topic I highly recommend reading Loic Le Meur’s blog post on “How much can you really make developing mobile apps?” (and note that this post is now two years old!) and the Vision Mobile report “Developer Economics 2012” (free download). Quote from the report: “One in three developers lives below the app poverty line.”

So now - is this all bad? Well. It depends. Personally I don’t believe that the current app store model is sustainable over the long term. Having said that - more and more time is spent on mobile devices of all shapes and forms. Which means that there are clearly opportunities for monetization and exciting new business models. Which is what I believe we will see over the next 1-3 years: People trying things out, experimenting with new models, many of them failing - and eventually we will find ways to build sustainable business on the mobile infrastructure.

Time to get going and experiment!

Edit: The New York Times recently ran an article “As Boom Lures App Creators, Tough Part Is Making a Living” which comes to similar conclusions.