The business models for iPhone applications



[Note: many of the links in this story will open the page for an app in the iTunes Store. I realize it can be annoying. I have thus made sure that hovering on the link will clearly indicate in the title if it is a link to iTunes.]

The iTunes App Store opened its doors a little more than 5 months ago and has been a huge success, at least based on the numbers of applications available (more than 10,000) and the number of downloads (more than 300 millions). With a size getting close to 20 or 30 million owners worldwide (remember, iPod Touch!), the market for iPhone apps sure looks like a gold mine. However, several developers have recently voiced their concerns about the way the App Store is shaping up: the gold mine may in fact look more like a golden goose slowly choking in an overcrowded market. Is that really true?…

The way I see it, there are three ‘business models’ for iPhone apps (while calling these ‘business models’, I don’t make any judgment on their viability at this point):

  1. Free apps
  2. Big fast sales
  3. Sustained sales

The distinction between the last 2 might seem arbitrary, but I want to explain here why I think there is a large conceptual gap between the 2 models, and why they are in most cases mutually exclusive. It boils down to this simple question: does the app need to be in the top 100 in the iTunes store? Let’s see how these different business models work for iPhone developers in general, for niche markets, and for the scientific market.

Business model 1: free Mac apps

There can many many different reasons for releasing a free app. The simplest is that the developer is not interested in monetary gain. The application Molecules is a great example in the realm of science-related software, and there are many other apps that simply don’t have any business side to them. The developers can still benefit in other ways, such as reputation, career development or simply the satisfaction of releasing a cool app or of helping a worthy cause. For scientists that approach iPhone development as a hobby or an interesting challenge, that can be more than enough motivation.

When profits are expected, the business model is simply that the free app will promote… something else. That something else could be a ‘pro’ version of the app, or the next version of the app, or an entirely different app from the same company. It could be a web service, a movie or an internet radio. Or the app could be directly serving ads. In most cases, the scheme will only be worth the development cost if the ‘viral’ effect kicks in and many users get exposed to it. As we will see, this usually means making it to the top 100 and staying there long enough.

Business model 2: big fast sales

Ever heard these iPhone success stories? Some adventurous developer works on an iPhone app every night for 3 months, pays the $99 to enter the iPhone developer program, and a few months later has enough income to quit his day job, start a company and hire a whole team of developers. Thus, there is no denying that you can build a very successful business out of a paid iPhone app, in a very small amount of time. But it is critical to keep in mind that in many cases, the sales are ultimately driven by the iTunes App store. If your app is on the Top 100, is featured or is a staff pick, you are in a good shape. The more you sell, the more you stay in the Top 100. The more you stay there, the more you sell. And vice-versa (left as an exercise to the reader). Since this process is self-reinforcing, it is pretty much all or nothing. As soon as the honeymoon is over, the sales drop.

One critical parameter being price, one obvious strategy is to target impulse purchases with low prices, for instance 99 cents. Churn out a new app every 3 months, rinse, repeat, and hope that one will take off. Twiterrific developer Craig Hockenberry calls these apps ‘Ringtone Apps’ and concludes that they are driving the quality down and preventing the development of more complex apps. Some of the Ringtones Apps probably deserve other names that can not be published here, seeing how some developers do not hesitate to pay for positive reviews or play trick on the App Store search results. If you want to remain honest, the Tap Tap Tap developers have argued that by focusing on quality and applying clever marketing, it is possible to maintain high levels of sale and make a profit with a low-price app. However, luck and market opportunity also matter, since it worked for Where To but not for Tipulator. In fact, they are the first to admit that it is hard and it is risky.

Thus, the secret sauce for a successful iPhone app is likely to remain a secret to everyone for a long time. For now, here are a few obvious things you will need:

  • A large target audience, preferably every iPhone and iPod Touch owner
  • An immediately-appealing app, to push the impulse purchase
  • A low price, to help the impulse purchase… more
  • A good icon and a good description, to help the impulse purchase… even more
  • A well-crafted app
  • Optional but recommanded: a good marketing push in the first couple of weeks after launch
  • Luck
  • Money in the bank and/or a real job

The first 2 items explain why the iPhone has become such an appealing platform to game developers, and why it is not a good model for niche markets and for scientists, as was discovered by the PCalc developer.

To some extent, the proliferation of ringtone apps is a consequence of the iTunes App Store model and the difficulty at finding an app: the virtous (or vicious?) circle of sales, unreliable search, shallow categories, suboptimal browsing,… I also agree with many that allowing time-limited trials of applications would go a long way in encouraging higher-quality higher-price apps. But as pointed out by fellow MacResearch editor and Mental Case developer Drew McCormack, there will always only be 100 spots in the Top 100. If your only hope for profitability is to reach the Top 100, most of the current constraints will still apply.

Business model 3: sustained sales

What should a developer do if his/her app is unlikely to reach the Top 100, for instance in a small market such as science? An analysis from developer Andy Finnell gives many useful pointers, including links to several real-world experiences, and some interesting comments. First and foremost, make sure you deliver a high-quality app, that looks good and will really help the user, without getting in the way. Then take a good conservative guess at the expected level of sale. It seems you may expect 5-50 sales a day after the first couple of weeks of exposure in the app store (I know, the s.e.m. is high). Estimate how much development effort you have or will put in it. Adjust the price accordingly. For relatively elaborate applications with several months of development, the right price is likely to be $9.99 or more.

Wait and see. The sales will have to be driven by costumers that think the app will help them in their daily personal or professional life. This could be through search within the App Store. But most likely, users will not know your app exists until they hear about it from a source outside the App Store. In other words, and following Apple’s John Geleynse advice, you are back to what has been driving the sale of every other piece of software before the App Store: some advertising, a lot of word of mouth. For instance, it probably helps if you are already an established developer coming from the Mac market, with apps like Twitterrific, Enigmo or Where To. The iPhone market is still in its infancy, but in this day and age, I am confident the quality of an app will eventually be an important parameter of success.

To conclude on a positive note, I think that the market for science-related apps is very appealing, in fact more appealing than many other niche markets:

  • Scientists spend most of their day with other scientists, in the lab, at department talks, at conferences, at meetings. This creates many opportunities to spread the word about the iPhone apps that they like.
  • There are also many students in labs, as well as postdocs. These are typically young, early adopters, more likely to have an iPhone or iPod Touch. They meet outside the lab too and can spread the word even more. When they are at a party or a bar, what is in their pocket?
  • Many scientists spend time away from their desk, either at the bench or in the field, which makes the iPhone a very convenient tool and a good complement to a computer
  • And let’s not forget it is a “pro” market, which means spending money to improve productivity is expected

In conclusion, if you have a great idea for an iPhone app that could help scientists get through the day, your prospects might be better than you think. Of course, this is just an educated guess. Getting real numbers about the iPhone app market is hard, and I am just relying on the few analyses already out there and on the anecdotal evidence I gathered from iPhone developers (posts on the web and private conversations). Hopefully, the developers of Molecules, Mental Case, PCalc, Grafly, OsiriX, Atom in a Box and the many many other science apps will have more insights in the comments…

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