Could the mobile app economy be a mirage, bolstered by news of billions of downloads but in the end a market blip that’s insignificant compared to less sexy but “real” mass market mobile services like SMS? That’s the contention of a very detailed analysis of the economics of iPhone apps by consultant and writer Tomi T. Ahonen. His long blog post is a must-read for all mobile watchers, including wireless operators.
We’ll run through his arguments, which are bolstered by the recent release of app revenue numbers by Apple: $1.43 billion total revenue over two years, with $1 billion of that paid to developers.
The numbers
The analysis starts with a look at download and revenue numbers, then moves on to try to figure out average price paid, while calculating free versus paid apps, and then looks at app development costs, all of which gets quite involved. So we’ll just cut to the money shot:
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.
Which leads to this strong conclusion:
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.
And ultimately leads the author to compare the app economy to the more traditional mobile economy of WAP, SMS, MMS and the like:
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.
Connected Planet’s take,
Rich Karpinski:
Because the primary source here is so strong, I’m not going to spend a lot of time rehashing the arguments. I encourage you to read Ahonen’s blog post. It’s a strong analysis and a stronger opinion. For now we’re interested in YOUR take.
It does indeed seem at times that the iPhone and iPhone apps dominate the mobile apps conversation. Google’s entry into mobile with Android garners similar column inches.
Is it all a mirage? Is the app economy a bubble? Is the SMS economy superior? Where does the truth lie?
Let us know what you think in the comments below:
While I agree that the vast majority of iPhone apps will make little, if any, profit, I think making money via the traditional alternative, i.e., SMS and carrier deck apps, is equally difficult. The reason that the average return on an iPhone app is so small is because there are so many apps available due to the extremely low barrier of entry. Compare that to the incredibly difficult task of developing apps for feature phones and getting prime deck placement. The cost of developing for 100s of different handsets, entering into carrier and aggregator contracts, and getting through their review, test, and approval process, minimizes the difficulties/cost/risk of pursuing this route. The average returns on these apps may be higher, but this is due to the limited set of apps available and who has the resources (and often pre-existing branding) to develop for this distribution channel. Developing for feature phone platforms (i.e., J2ME) limits the user experience and innovation by forcing apps to use the lowest common denominator capabilities of these devices. While they have the potential to reach a much wider audience, there are many other factors that go into deciding what platforms a business wants to develop for.
There is definitely hype around mobile apps, but that does not necessarily equate to a bubble. The tech bubble of the late 1990s was caused by venture capitalists and investors pouring millions of dollars into ill-conceived business ideas speculating that they would bring in large future revenues. The intent of many of today’s mobile apps is different. Many of these apps are developed by one or two people with little expected return; others are developed as loss-leaders; still others are used to simplify mobile access or expand a user base on an existing web property.