Full Analysis of iPhone Economics: Bad News?

http://communities-dominate.blogs.com/brands/2010/06/full-analysis-of-iphone-economics-its-bad-news-and-then-it-gets-worse.html

by yewweitan • 16 years ago

144 92 16 years ago

communities-dominate.blogs.com

illumin8• 16 years ago

His entire analysis is basically taking the revenue total for all apps, divided by the number of apps, and saying each developer only makes an average of $3k per year. Sorry, this is not a good analysis. Some people give their apps away for free. Some quality apps make millions. This doesn't mean the opportunities are not there.

A similar analysis could be done of PC shareware software authors, with similar results.

jroes• 16 years ago

He has data that indicates 73% of total apps on the store are paid. He then bases his remaining calculations on that paid app number.

wallflower2• 16 years ago

Count of total apps paid compared with Count of total apps free has probably very little correlation with app store revenues. The best case (equal sharing) isn't realistic, as we all know that some apps generate hundreds of thousands of dollars over their lifetime.

> So the best case of how few apps get to divide that 1.43 Billion dollars over the past 2 years, is 164,000 actual apps

metageek2• 16 years ago

Yeah, but he doesn't take into account the fact that 73% of apps do not get 73% of the downloads.

chops2• 16 years ago

Nope, that's not what it is. He explicitly states that he excludes the free apps in the revenue analysis. He uses a combination of numbers from Apple and from other 3rd party services to come to the median revenue per paid app at something like $680/year.

He also fully acknowledges that there are some extreme examples that make it big, but that half of all paid apps are currently making less than $680/year.

This is a pretty thorough analysis.

warfangle• 16 years ago

Then there's also the point that while some extreme examples made it 'big,' in the long run of things mobile, 3M downloads really isn't all that big.

AlisdairO• 16 years ago

I'm not sure I buy that a typical iPhone app costs $35,000 to develop. Considering the simplicity of most apps, combined with the fact that many apps are effectively the same program with some content alteration, it seems like a really inflated figure.

pvg6• 16 years ago

It doesn't really make much difference, for the purposes of his analysis. Let's say a typical app costs $1500 to develop. If his other numbers are right, that typical app would take about 2.5 years to break even. His argument is that, on average, developing an iPhone app is, in itself, a fairly dismal economic proposition.

mgkimsal3• 16 years ago

However, making, say, 80, spending time promoting them, and perhaps having a few of those be moderate successes may make this a much more viable option. I have a friend who's pursuing this option of making multiple apps (not sure he's to 80 yet, but will likely surpass that in the next year).

I agree, the chance of one app being the runaway success that affords one an early retirement is pretty remote, but the tech press loves to promote the huge success stories, and many others love to follow them.

xenophanes7• 16 years ago

Why would an app take $1500 to develop? I wrote 4. They took less than $1500 total.

adamt• 16 years ago

I agree. It obviously possible to spend that much, but many apps could be a damn site cheaper (you can put together a lot in something like Lua/Corona in a few days). It reminds me about from in 2000, people were saying the average e-commerce website costs $250k-$1M to develop. I think it depends who you ask. If you ask the average BigCo, how much it costs, you might get that answer, but the average hacker will probably give you a very different one.

Tichy2• 16 years ago

Lua is not allowed anymore.

hackermom• 16 years ago

"Now the heartbreaking news. Lets factor in our development costs. Again, independent source, the Internet Retailer reported on May 1, 2010, that most apps cost between $25,000 and $50,000 to develop."

These numbers were really taken out of the ass of a troll.

ThomPete• 16 years ago

I don't understand how this is any different than if you did an analysis of Startup Economics.

In any space with great competition and where your product is scalable, few will make enough money to justify their investment.

Also many paid apps are part of a bigger picture, the iPhone app is not the only revenue stream they have.

That's reality, now deal.

rpledge• 16 years ago

Interesting analysis, but I'd like to see the numbers for apps that are actually maintained and marketed vs. some guy who hacked up an app and never fixed any bugs or improved it based on feedback. I suspect the number get better if you filter out the crappy unmaintained apps (but of course, this isn't an easy data set to obtain)

Manfred• 16 years ago

I agree, there are a lot of apps that didn't take the developer more than 5 hours to put together. Earnings made by well made apps is probably much higher.

Retric• 16 years ago

Yep, Half of all developers will earn less than $682 per year assumes the average developer produces 1 app. Also, most apps revenue falls off over time so a more realistic number is 80% 682 * 2 probably 1091$ in the first year and 272 in the second.

If someone is churning 20 in a month and then getting 1364$ * 20 = 27,280$ over two years for one months work that's not bad.

PS: The average app has probably only been out for 1 year so it may be reasonable to double these numbers. Basically, anything released yesterday is unlikely to have generated much revenue, averaging ALL apps over a 2 year earning period is silly.

briancooley4• 16 years ago

"Full Analysis" seems like a bad title for this post.

First off, in app purchases are not included. Secondly, his argument against free apps is simply that the reach is smaller than other platforms. Finally, he acknowledges that the median paid app get fewer than 1000 downloads.

The 25-50K number for development costs is way off for the median app. Something like $5K-$10K is more in line for most of the apps I'm seeing (but I work cheap), and I've done a couple small ones (probably more representative of the bottom half of the distribution) for clients in 3 days' time.

roel_v2• 16 years ago

None of this refutes his point, which is that developing for iphone is a suboptimal use of marketing/advertising dollars. Even if you'd assume his numbers had a 100% error margin, you still couldn't get iphone apps to work.

briancooley4• 16 years ago

His analysis of free apps doesn't really do that segment justice. He totally ignored the mobile ad network space and addressed only a portion of what the market seems to be by focusing on Hilton and Walgreens. I'm not sure those cases are worth refuting.

xenophanes7• 16 years ago

Just assuming he's only off by 100% is silly. There are lots of ways he could be off by a factor of 5 or 10.

DougBTX2• 16 years ago

It seems like the expectations are very high for the App Store, so perhaps this article is just a reaction against hype.

But, don't we say that only one in ten start-ups makes it? So, as a baseline, why expect more than one in ten apps on the App Store to be profitable?

blacksmythe• 16 years ago

Because in a start-up the one in ten that makes it makes the average effort worthwhile. (That is how VCs make their money)

bensummers• 16 years ago

It'd be interesting to see a comparison to "traditional" distribution methods, eg shareware, web apps, and so on. Maybe it's just that writing small software applications doesn't pay?

1gor2• 16 years ago

Why does the author assume normal distribution (bell curve) for apps' revenues? In reality app sales are similar to those of books and follow power law distribution. A few bestsellers will account for large chunk of overall app sales. Then there will be a very long tail of unprofitable apps.

Therefore all of his numbers and his final conclusion are wrong. People do not write iPhone apps in order to achieve some sort of 'average' income. They hope to strike it lucky and get a disproportionately large payoff.

alttab4• 16 years ago

Where are you getting the normal distribution information from?

"This is the average, remember, it is not the median. The average skews too high because of the long tail. There are a few who make several millions, who distort the average number, so it is not true that half of iPhone App Developers earn more, and half less, than $3,050 per year."

He references the long tail you mention, and describe exactly what you mean about some people making a lot, but because of distribution and how users find and download apps - its more akin to say - the lottery - than actual market strategy.

Some will make money. Most of them will be development/contractor shops that charge out-the-ass for mobile apps to companies who want a "mobile presence." These medium to large companies won't realize that the money they are losing isn't worth it until its happened a couple of times. Then they'll stop coming back.

That said, independent developers making money on that app store directly is a complete crap-shoot. Very few get rich, lucky ones make a very modest living, more get a hobbyist return, most get dick - and some don't even get the money they did earn from Apple.

Therefore all of your rebuttal and final conclusion are wrong. How many books have you written on the subject?

Note: The reason he uses a normal distribution is because it would actually help DISPROVE his thesis, a normal distribution would make it easier for an app developer to make money, not harder. When the normal distribution showed a shitty return - he reminded us it was actually worse.

NyxWulf• 16 years ago

Unfortunately that's not necessarily true. A normal distribution is just vastly different than an exponential distribution. Using the central limit theorem allows you to expect the mean to be normally distributed around your samples, but that's about all.

The reality is that taking an average over an exponential distribution is largely meaningless. There are an infinite number of distributions that would create that exact mean. Some of them not at all profitable for certain apps, others very profitable.

The problem with using an average over this distribution is that it doesn't give you anything to work from. You can't figure out who is profitable and who isn't, or how high up the curve you need to be to be profitable. Taking an average over all of the apps in the app store is like taking the average revenue of every website that tries to make money on the internet. It's a meaningless number.

At the end he compares the low numbers in averages to a single anecdotal example of something that had a 100 Million downloads. On the one hand he dismisses the few highly successful appstore apps but then uses another singular example of a highly successful app to recommend a different platform. Overall the methodological approach is deeply flawed.

I could go on, but ultimately, I found this analysis not very insightful. As with any new channel, it takes some time to figure out what works and what doesn't. Who is going to buy and who isn't. In almost all software the distribution is exponential where the top 10 to 20% make over 90% of the revenue. The same is true of the app store.

It all comes back to fundamentals. Find an unmet or under-served need in the market, figure out how big that market is, figure out how much it's going to cost to fill that need, make sure your app fills the need, and start trying to sell it. Then once you've built up a sales platform, then you start scaling it.

1gor2• 16 years ago

> Where are you getting the normal distribution information from?

The author spends much effort estimating an 'average' app income and costs. Talking about averages does not make any sense in case of power law distribution. He is using Gaussian approach which is a wrong model for given phenomena. Bringing skewness/kurtosis/whatever to the table doesn't help a thing since he has completely mis-classified the problem.

> That said, independent developers making money on that app store directly is a complete crap-shoot.

Can the same can be said about entrepreneurs in general? What is an 'average' income of an entrepreneur (including failed ones)? Is it worth it? Do you aim for this dismal income when you start a business?

Scalable business model is completely different animal from a non-scalable one (i.e. selling your personal time as a developer, consultant etc.). Quite a few developers expect from iPhone apps the same they are used to in their contracting/salaried careers.

powrtoch• 16 years ago

People play the lottery for the same reason. The point (don't waste your time) still stands.

pvg6• 16 years ago

Why does the author assume normal distribution (bell curve) for apps' revenues?

He doesn't. He tries to estimate the median precisely because he doesn't actually know the distribution although in several places he specifically mentions that it's likely not 'normal'. He's going for the median because it's more informative than the average, given the uncertainty about the distribution. It's a little moot, anyway, since the average figures are pretty lousy and given the most likely distribution, the median just makes it worse.

adolph4• 16 years ago

"former Nokia executive" [number froth] "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."

This guy makes a strong case for skating to where the puck used to be.

MicahWedemeyer• 16 years ago

I'd say there are a lot of pucks, and he's suggesting skating towards some of the less sexy ones. The app store is shiny and new and fun for hackers, but his point about market size is pretty valid.

All iphones are SMS-capable. Not all SMS-capable phones are iphones. Just like Twitter never killed blogging, smart phones still haven't killed plain old dumb phones, either.

adolph4• 16 years ago

Verily, there are many pucks.

It is pretty funny that the author includes WAP as one.

WilliamLP• 16 years ago

Some people seem to assume that building a profitable app is entirely about luck, and not about having the insight and ability to develop something better than what is in the store currently. Many of these app are developed by beginners and casual hobbyists and, frankly, just aren't very good. Thinking you can work to be in the top 10% of this crowd isn't necessarily unrealistic.

praptak• 16 years ago

Fair enough. How much does the last app in the 10% make?

xenophanes7• 16 years ago

> Half of all developers will earn less than $682 per year. Do you still think this is a good business idea?

I'm one of those developers. And do you know why? Because it's not my business. I wanted to make some apps. I didn't put in a huge effort.

For the numbers to mean anything, you should filter out the 90% (or whatever) of apps that aren't intended to be part of a serious, profitable business.

pvg6• 16 years ago

The numbers, assuming his inputs are reasonably accurate, still mean something - most people trying to make money selling iPhone apps don't make a great deal. It's easy to distinguish between apps that are trying to make money and apps that aren't - apps trying to make money are not free. The sort of filtering you want is next to impossible - you're asking that only the apps that are trying to make money but really mean it are to be considered.

He doesn't address something that maybe you're touching on, indirectly - unlike the markets where someone makes zillions on SMS voting for a popular TV show or selling Tetris to feature phone users, the iPhone app market is very accessible to J. Random Hacker. Compared to the previous age of mobile development, it's a major improvement - same device (more or less), same screen size (more or less), same framework, no complicated permission needed from the carrier, payment taken care of, etc, etc. Plus, you never hear of anyone saying they program J2ME or BREW or Symbian apps for fun.

xenophanes7• 16 years ago

> [all] apps trying to make money are not free.

No, 3 of my 4 apps are paid, even though I'm not making a serious effort to make money. Why shouldn't they be? I don't mind making a little money.

Just because filtering the numbers to get useful results is infeasible doesn't mean we should pretend averages across the entire store mean anything for a person who sets out to build an app store oriented business.

It reminds me of all the psychological studies that use inadequate controls just because adequate ones for what they want to do would cost trillions of dollars. Then they claim to have done legitimate science. But the standards of science don't lower themselves to what data we can easily get.

krig• 16 years ago

This sounds very much like the way things worked when I was working in the AAA games business as well. >90 percent of all titles are lossleaders, and the few that are hits make up for the lost money developing the others.

My guess is that most branches of entertainment are similar. Movies, TV, music etc. There's no such thing as a steady, guaranteed income when it comes to things like this (in my experience/opinion).

That doesn't mean making apps is not a viable business. Just not for everyone who tries.

aero142• 16 years ago

Unless you are Pixar.

loewenskind3• 16 years ago

I thought it was already understood that the model of "create a $1 app and sell 10k of them per month" was long over. The App store is still a relatively new market, so people will continue to learn how to be successful on it.

I just got an iPad and started using the App store for the first time in my life and guess what? Out of the 5 things I wanted to use the pad for, 3 of them didn't exist at all. There is plenty of space in this market I would say. Just not for iFart anymore.

mgkimsal3• 16 years ago

Care to share what those 3 things were you want to do but can't find apps for?

loewenskind3• 16 years ago

I would, but I'm busy building them. ;)

3pt14159• 16 years ago

I'm also curious as to what you wanted to see. When I picked up my friend's iPad (a month or two ago) I struggled to find a good finance app that actually gave good charting and numbers for stock market options and commodity futures. I know I'm not the only one who would be interested in that AND I know that those of us who are have fairly deep pockets.

loewenskind3• 16 years ago

Yea, in my experience it seems the apps are pretty focused. There are a lot of games, a lot of toys and a lot of professional made apps in specific areas (e.g. drawing/photo editing).

pchristensen• 16 years ago

When reading this, it helps to remember that the author is a former Nokia executive that does consulting and speaking to Big Business. He mentions Hilton Hotels, Rite Aid, and Walgreens.

I don't know how you would split out Brand apps vs hobbyist vs junk apps, but he should have mentioned that. I'd be surprised if there are more than 10K Brand apps like the ones he appears to be most familiar with.

mtholking• 16 years ago

I don't care for the 35k iPhone App and 3k WAP site numbers that he pulled out of thin air. From my experiences, the costs are not so disparate.

iPhone vs. WAP is a poor comparison because an iPhone app and a WAP site are two different digital tactics that address completely different objectives.

Brands are not buying iPhone apps to get the same utility that is available from a WAP site. They are buying them to make their brands appear technically savvy, and to increase engagement.

lecha• 16 years ago

For the sake of argument, let's assume the analysis is off by two orders of magnitude (i.e. assume half of businesses will earn less than $70K per year).

Can anyone justify an investment in development of an iPad-only productivity software? Do you think a startup can raise capital based on such economics?

My takeaway: Selling AppStore apps/ads isn't THE business model. It should be one of the channels amongst others.

1053r• 16 years ago

I think a lot of us are instinctively reacting negatively to this article, and I don't think it is because it's news we just don't want to hear. There is one point that the author fails to take into consideration: future growth.

Anyone who has used iPad or iPhone or an Android device can tell that devices like these, not Symbian or WAP or Brew or whatever, are the future. Those other platforms might catch up, but for now they lag abysmally behind in terms of user experience. And so while they might outnumber iOS and Android for now, that numerical advantage can not last.

Walk around a Y-Combinator event (or CES, or E3, or anywhere else where leading edge alpha geeks congregate) and count phones. I'd be willing to wager a lot of money you'd see a bunch of iOS and Android devices, a few blackberries, and a smattering of ancient nokia and samsung free phones held by users who "just want to make calls" (and thus aren't going to be reachable by any apps at all, WAP or Java or otherwise).

So, yes, a company developing an app today for iOS or Android isn't going to make their money back on the platform as it stands in any reasonable amount of time. But a company or developer who positions themselves to be on top of a platform that is rising meteorically (and will displace literally billions of feature phones over the next decade and a half as moore's law drops silicon costs by a factor of 1000) is going to do well.

Hype is about future expectations. When expectations rise above exponential growth in our industry, those expectations usually turn out wrong. But the mobile market has a current penetration of over 3 billion people and I'll wager practically every phone on the planet will be a "smartphone" in under 15 years. That's a lot of headroom for growth.

char• 16 years ago

My main issue with this article is that the author assumes that all developers operate equally. He averages the individuals who build apps in their spare time and might make thousands of dollars as 'extra' income, with the large app companies who spend tremendous resources on building apps that get high returns. When he crunches his numbers, he gets results that are probably very far from the actual reality of things.

ww5202• 16 years ago

He is an ex-executive. What does he know about software development?

rfolstad• 16 years ago

How is this bad news? The consulting firms charging 35K per app are making a killing!

vessenes2• 16 years ago

It's interesting that he's a big business guy. I would restate his title as: "the Apple store is for suckers or smallfry, if you're a big company."

And, he's right. Big companies do take $50k+ to create mobile apps. Big companies do have much better things to do with their money; they can add far more value at greater scale. Of course, Jane developer might not be in the same boat.

Another interesting confounding variable: he clearly conceives of developers as 'one-app' developers. And, he's right that this doesn't pay on the apple store. There is just, frankly, some randomness in which apps tip on the store -- most developers have figured this out already, and of course Apple gives links so that developers have an easier time cross promoting.

yewweitan• 16 years ago

You're absolutely right. But where's the fun in a headline like that.

More to the point, I think if you read the rest of his blog, and take the perspective of some of the larger international companies, going for gold with the iPhone won't be the best business strategy.

Tomi has given some case studies of how MMS has worked for car dealers in Germany, and even campaign promoters in Australia. There is this under-exploited niche called mobile marketing, which relies on WAP, SMS, MMS, etc which could give pretty high ROI for large companies (eg: BMW)

Especially if you take a B2B perspective, what he says makes huge sense.

vessenes2• 16 years ago

Yep, agreed completely. The Apple app store is a democratizing force.

Locke• 16 years ago

I'd have preferred to see a more detailed breakdown of apps. It may be a terrible market for utility apps. Or, for apps that are more feature than product. How many apps are truly products with solid business models? How do these apps do?

Or, how does the picture look for games? Especially now that game developers can embrace a virtual currency / goods business model. They can get all the distribution benefits of being a free app while still making (potentially much more) money over a longer period of time. Or, do these apps not count as apps because they're too close to the web-based games that are doing so well on Facebook?

If you're a developer, looking at industry-wide numbers is good, but it's better to research the apps in the niche you plan on entering.

halostatue• 16 years ago

I can't believe this guy because he claims that the iPhone 4 launch was a stumble.

http://communities-dominate.blogs.com/brands/2010/06/smartph...

What?

founderceo• 16 years ago

The analysis misses the point of why people get into mobile development.

See http://bit.ly/iPhone-economics

ww5202• 16 years ago

His proposition of doing SMS app because the Idol/whatnot had made hundreds of millions is misleading. The cost of doing a SMS app might be low but the app itself is an accessory of the real product, the game show. It takes tens to hundreds millions of product and marketing cost to make and run a show like Idol over years. You think a $35,000 developed SMS app can make that kind of money by itself?

xcombinator• 16 years ago

I think this man doesn't get it, as a "former executive" he thinks anything in live is money.

People write apps for iPhones because they dream to do what they love without working for the man. Of course it is only a remote possibility, but it is real.

99% of the people that went to California searching gold didn't find it, as in SouthAfrica, but the now deeper old mine was discovered by a solitary man looking for gold armed just with a mining pan.

There is something in the human spirit that is as valuable as money that makes musicians painters, singers,movie makers or engineers that maybe won't get rich keep trying. Maybe they get to work on what they love.

PS: I'm an iPhone App developer myself, since Linux Click an run app store I believed that a "right" implementation of an Appstore was going to be the future. I expected to be Apple the first to to this. In contrast with this executive they just seem to "get it".

Steve Jobs is really smart in this too, when he creates something he diminish it, so the competitor's executives see an appstore and say: It's only a mere millions dollar market, not important.

IBMs mainframes were the "important stuff", when real money was, mini computers were just "cheap" toys with no real application. People who wanted "job security" deciced to work with the "big boys" because it was safe... until it was not.

JVerstry• 16 years ago

Excellent analysis !!! Good job !!!

rmundo• 16 years ago

This article makes sense for you if you're the kind of company that needs 35k to create an app. In that case, sure, stay away from the app store. But for indie devs with a bright idea, the app store is a great opportunity to try something out for a very low cost. A very interesting space for startups, I'd think.

aneth• 16 years ago

This is an interesting analysis but a very flawed conclusion. What percentage of restaurant owners will make money? How about online entrepreneurs?

Just because the expected value of building something is low doesn't mean it's a bad model. It just means you have to execute well and that most people fail.

Full Analysis of iPhone Economics: Bad News?

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