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iPhone economics and lower barriers to entry

The power of the App Store is defined by more than direct revenue.

Tomi Ahonen at Communities Dominate Brands has an interesting analysis on iPhone economics. It’s a substantial piece with a lot of good stats, and his key conclusion is:

… don’t invest in [app development] 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 …

He comes to this conclusion after observing that the vast majority of apps will lose money, while only a tiny handful generate significant revenue. Consequently, the logical response is for developers (and businesses) to instead focus their attentions on more lucrative opportunities. In other words, the only way to win is not to play the game.

While his numbers are sobering, they’re not all that surprising. Consider publishing — people have long known that the vast majority of authors slave away on projects that will never make any money, while a very few stars (think J.K. Rowling) make a killing. Whatever you call it — the long tail, the Pareto principle, the 80/20 rule — this simply appears to be the brutal truth of most media industries, from publishing to movies to music.

What I think he overlooks — or is bemoaning — is the important role the App store is playing in lowering the barriers to market entry for developers.  He cites the big money opportunities as “SMS, MMS, and WAP” (seriously, WAP?).  But, good luck trying to get a biz dev deal there. Only a few, really well-connected organizations are going to get those. When you compare the costs of hiring some kid out of college who can’t believe he’s actually getting paid to write apps to the cost of building the kind of highly skilled (and highly compensated!) sales force required to put these deals together, an app investment suddenly doesn’t look so bad.

No, the bigger story is that the App Store has exposed incumbents in the mobile industry to the same sort of asymmetric competition that has reshaped the media industry over the past decade. Developers are responding in droves to the economic incentives that lower barriers to entry create, as well as the fact that the App Store has generated $1 billion in royalty payments in just a few years (by Ahonen’s estimates). By way of comparison, the entire US tech book market is roughly $250 million gross, and it’s been around for decades.

A single developer, or a small group of two or three developers, doesn’t need to make a killing. What would be a rounding error in a big development deal is a huge win for these people. Or, they may simply be in it for the fun, and the money is totally secondary. Or, it could be that they’ve whipped something together quickly and put it up to see if anyone bites. (If you’re interested, Mac Slocum is running a poll on Answers where you can chime in on other reasons people write apps.)

What the App Store did brilliantly is create a marketplace that anyone with the appropriate skills can enter. The development tools are free, the membership dues are cheap, and Apple’s 30 percent take seems pretty reasonable when you consider the frictionless access to a global marketplace they’re providing. This seems like a way better deal to the average developer than trying to get a development deal with phone manufacturers.

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  • Denis

    I am of the same opinion as you. The App Store is perfect for the small developer and allowed for some simple but creative apps that may not have seen the light of day otherwise.

    BTW, Apple announced at WWDC 2010 that they paid the developers a billion dollars in royalties. That’s not bad and that does not include the revenues from ads.

    In addition to the free apps that are published to get exposure or revenue through ads, many free apps are published as a service by the government (state, cities,..), businesses or other organizations. If you do an average without taking those apps into account, you may end up with a fairly good number.

  • JulesLt

    It strikes me that a lot of people just fail to acknowledge that it’s simply a new market – and the usual rules apply – you don’t make money from creating things, you make money by selling things.

    Some people have got lucky in the App marketplace, but it reminds me very much of the early 80s computer game boom – which eventually turned into one of the more successful media industries ever.

  • Andre

    There is another aspect of the app store that is interesting for developers. While an app may be free to the consumer, in some instances, developers are paid by another party to develop the application.

    Compared to the shareware model previously used by small developers, the app store presents a greater potential.

    IMHO: the app store made SmartPhones, SmartPhones.

    And I am not one of those gushing Apple fans.

  • Andre

    There is another aspect of the app store that is interesting for developers. While an app may be free to the consumer, in some instances, developers are paid by another party to develop the application.

    Compared to the shareware model previously used by small developers, the app store presents a greater potential.

    IMHO: the app store made SmartPhones, SmartPhones.

    And I am not one of those gushing Apple fans.