The $700 iPhone app

No, the title is not referring to Prada’s latest iPhone app, it is in fact related to what anyone should expect in terms of overall revenue when releasing a new paid iPhone application. Tomi Ahonen has put up a brilliant analysis of the economics behind iPhone apps with the following premises:

• Apple claims that cumulative app revenue has reached $1,4bn by June 2010. This is based on 5bn downloads (free and paid)
• Several reports have pinned the number of paid apps to be about 73-77% of the total. At the moment, there are 225.000 apps in total, which at 73% gives 164.250 paid apps.
• The average revenue is roughly then 1.4bn/164.000 less Apple’s 30% cut, which means developers earned on average $6.100/app over a 2 year period, or $3.050 per year/app.
• However, average is not a relevant measure, because it is skewed as the tail of apps is long. There are a few apps who make the majority of money, so the relevant number is the median, where 50% make more, and 50% make less
• The average price for an app, based on a number of reports, is roughtly about $1.95/app, which puts the number of paid apps downloads to about 733 million, or 15% of the total number of downloads.
• SuperCollider Blog reported that half of all paid apps have less than 1000 downloads, say 999. At $1.95, that means the median revenue over two years is $1363, or $682 for one year, i.e. app $ 700 (see SuperColliders post on the economics of branded apps for more).

So why would any developer even consider doing an app for the iPhone, knowing that it may well cost 15-50k to develop? Perhaps for the same reason people buy Lotto tickets, or bands want to become rock stars, or kids dream of playing in the NBA.  The odds are insanely stacked against you, but at least you have a shot.

Apple has finally provided developers with an easy access to the market.  Developing for J2ME has been a pain since the inception, and distribution has been even worse (see “What’s the deal about app stores” as well as an oldie, but goldie research report on the economics of mobile content distribution).  Before iTunes, developers had to adapt to 100s of handsets, deal with 100s of business models and distribution outlets, and becoming a successful content provider turned out for many to be a long and painful experience from idea conception to bankruptcy court. But $700 in revenue is not a sustainable business.  So if not the iPhone, can Android save the day? Apparently not for Exit Strategy NYC:

No doubt, the situation is similar for many developers, which is why the intense focus is on the iPhone. But as a developer, you cannot and should not bet the farm on the iPhone. Unless you have a substantial marketing budget to promote your app (or an installed base of apps out there to promote your paid apps), you will likely not make money on the iPhone.  You cannot ignore other platforms, such as J2ME and Android, despite the distribution difficulties. There is plenty of evidence of success stories around for local content providers, but that is because they work closely with the distribution channel (mostly mobile operators), to ensure good positioning on the mobile operator portal, and while multiple platforms are a headache, you have no choice at the moment but to deal with it. So your strategy should consider:

• Securing a local carrier distribution deal, probably on J2ME
• Consider creating a platform/service, rather than a one off app. In that way, you can possibly rely on a web based distribution model for your app (i.e. if you create a soccer game, why not create a football league game, with ability to manage your team, post scores on Facebook etc) – any which way to promote your game being played

And as for brands/publishers, apps should not be a stand alone product, rather use the apps together with your existing services. Apps can promote your other offerings, complement your other offerings, or be an add on revenue from other offerings. But they have to be seen in context, not as stand alone. Also, apps is not necessarily the answer. Get your mobile site offerings right first before putting loads of $$$s into app development, or you will be wasting your money.

And let’s hope Google, who has all the tools at their disposal, starts emulating the eco system that has made iPhone+iTunes so successful, but in an open, large scale model. Teach content providers how to advertise their apps – heck, give them free ad credits for releasing Android apps, make discovery a simple and beautiful thing, and truly work the developer community to start ensuring that you close the payback gap Apple currently enjoys.