All About Apps: Part 4. “Where’s the Money?”

This is Part 4 in the series “All About Apps”.

With all the publicity about apps and the rush to build them, it is time to ask “Where’s the money?”. To put it differently, how and how well do developers monetize their apps?

Pay-per-Download

This is the leading revenue model for mobile apps. Users pay for each of the apps they download. On Apple App Store, for example, it is the route taken by 59 percent of developers, compared to 43 and 42 percent for in-app advertising and in-app purchase strategies, respectively (O’Dell, 2011). For their services (e.g., providing a store front and processing payments), app stores typically get a cut of 30 percent on the selling price of an app; the remaining 70 percent go to developers. These stores are getting very crowded as the number of apps continue to rise rapidly. So, competition among the apps becomes more intense and their prices are on a decline as a result, particularly among the top-100 apps. Between January and December 2010, the average selling price declined by 12 percent overall and 19 percent for the top-100 apps on Apple App Store, 24 and 24 percent on Blackberry App World and 29 and 61 percent on Nokia Ovi; on Google Android Market, there was a 1-percent rise overall, but still a 9-percent decline for the top-100 apps (Distimo, 2010 December). The majority of apps are now priced below $2.00, be them iOS, Android or Blackberry apps. The percentage of apps priced at $10 and up is in the single digit across all app stores (Distimo, 2010 November).

Most developers would dream of having a mega hit like Angry Birds but more often than not they find it tough to make a living from paid downloads. One third of paid apps generate less than $1,000 each for their developers even though they often take months to develop (Vision Mobile, 2011). The app business seems to be more like the music business than the software business, some would say. On average, it may take as much time to build an app as to compose a song; both bring in about the same revenue per download, below $2.00 (before the 30 percent cut for the app stores) in most cases; some become mega hit but most linger in the “long tail”. Apart from “evergreens” (e.g., games, utilities and programs to use Facebook and Twitter), even more successful apps often quickly fade into obscurity (Economist, 06/17/2010). Increasingly, developers are turning to other strategies for monetizing apps or even switching to earning their money through salary or commission from developing branded apps for organizations that use such apps for marketing purposes, e.g., advertising or engaging customers (Vision Mobile, 2011).

In-App Purchases

This revenue model let users conveniently acquire upgrades, additional game-playing levels, new content or virtual goods right within an app, without having to go back to the app store. It enables developers to monetize user engagement ratherthan downloads. Apps with in-app purchase functionality can be either free apps or paid apps (at a price lower than it would be otherwise). Purchases from within an app have to be paid for with real money in return for the desired items or app features, or for virtual currency to be used inside the app. Here are some examples.

  • Tap Fish by Gameview Studios is a free game app available on both iOS and Android platforms. It offers multiple playing levels with different numbers of aquariums. Users can decide what fish to grow, sell and breed; they can buy, feed and sell their fishes; they can add backgrounds (e.g., Atlantis), coral reefs, caves, sunken ships and mermaids, among others. In-app purchases give users virtual currency, called “Fish Bucks and Coins”, which is used for game activities.
  • Guitar Hero by Activision Publishing is a paid game app ($2.99 on iOS platform) that let players create rocker avatar and play rock guitar. It comes with only 6 songs but players can get more through in-app purchases of $1.99 per 3-song pack.
  • Amplitube by IK Multimedia enables its users to turn their iPhone, iPod Touch or iPad into multi-effect processor for an electric guitar and a mobile recording studio. Its free version comes with only basic features, which can be expanded with in-app purchases (e.g., metal and clean amp effects for $4.99 each and chorus, wah and delay pedal effects for $2.99 each). Its paid version, at $19.99, comes with a bundle of selected features beyond the basics. Even here, users still can add more features through in-app purchases (e.g., graphic equalizer for $2.99 and 4-track recorder for $9.99).
  • FarmVille by Zynga is a free game app that was initially designed for Facebook platform but is now available also on mobile devices. Players can buy farm land then plow, plant, harvest and sell their crops, thus spending and earning game money doing that and other related activities. They buy game money, called Farm Cash and Coins, through in-app purchases.

Apps with in-app purchase feature: Tapfish, Guitar Hero, Amplitube and FarmVille

In-app purchases fall into three categories: consumable, durable and personalization items. Consumable items, once used, cannot be used again,e.g., virtual currency or special items that can help a player get through a game faster and ascend to the next level. Durable items can be used again and again after their purchase, e.g., additional playing levels or add-on features. Personalization items create a more personalized user experience, e.g., decorative items such as sunken ships and mermaids in Tap Fish game or clothing outfits for rocker avatar in Guitar Hero. About two thirds of in-app purchase dollars for game apps are consumables, with virtual currency purchases being most common; at the other end, personalization items account for only a tiny fraction (2percent); durable items account for the remaining or nearly one third of in-app purchases (Warren, 2011).

In-app purchases generate a new and very substantial stream of revenues. On Apple App Store, for example, they are found in only 4 percent of iPhone apps but they generate 72 percent of the revenues in 2011; by comparison, paid-only apps bring in just 28 percent. It was the other way around in 2010 when in-app purchases generated just 30 percent of the revenues and paid-only apps 70 percent (Distimo, 2011 July). Data for Android Marketplace is currently not available. Android has been supporting in-app purchases only since April 2011, whereas iOS has done so since June 2009. Overall, in-app purchase revenue model has become more popular with app developers and will rival pay-per-download revenue model before long (both being the choice of 50 percent of developers for 2012); the latter model has lost some of its luster (Ogg, 2011).

In-App Revenue Models Gain Popularity

App stores maintain their typical 30-percent share of in-app purchase revenues, leaving the remaining 70 percent to developers. They justify their revenue share for providing the services needed by such purchases (e.g., electronic delivery, secured billing and payment processing). On the other hand, they can impose very strict requirements to protect their share. Apple will reject (from its App Store) any apps that do not use Apple’s in-app purchase application programming interface (API). Such apps would let their in-app purchases bypass Apple’s service infrastructures (i.e., not using iTunes and Apple customer ID) and hence skip paying Apple its revenue share. For some apps (e.g., e‑readers), their developers simply cannot afford the 30-pecent cut for app stores after having to pay also for the content (e.g., books and magazines) to publishers. Sony eReader was reportedly rejected by Apple App Store for not complying with its restrictions whereas iFlow Reader was taken off the App Store by its developer for being too costly. Meanwhile, Amazon Kindle app simply lets its readers go to Amazon web site to purchase books. With its highly efficient website and convenient ordering process, Amazon still can make the whole content purchasing process as seamless as possible for Kindle app users without providing in-app purchase functionality. Most other e-reader developers cannot do that; neither can they afford the 30-percent revenue share for app stores.

In-App Revenue Trends

In-App Advertising

This revenue model relies on payments from advertisers for having their advertisements inserted into individual apps when the latter are in use. Advertising is a major source of income for many media channels (e.g., newspapers and magazines, radio and TV programs, and websites), and mobile communication is no exception. In-app advertising, or “appvertising”, has received a lot of attention lately after Rovio begins offering the full-size versions of its Angry Birds games for free and funds them through in-game advertising; it is generating about $1 million a month from appvertising on the Android platform alone. Meanwhile, platform operators have also promoted their mobile ad networks (e.g., Apple iAd and Google AdMob), which help advertisers effectively target their audience and serve their ads, give consumers greater user experience and efficiently manage billing for app developers.

As a huge number of apps are being downloaded onto mobile devices and as consumers are spending a great deal of their time using these apps, appvertising has become a rapidly expanding business opportunity despite being eclipsed by the even faster growing volume of in-app purchases. On per-user basis, the average advertising revenue is only better than half of what it was in 2009. However, with a fast growing population of smartphones and mobile devices, appvertising revenues are project to rise from $87 million in 2010 to $894 million in 2015, or ten folds in 5 years, admittedly from a small base (Flurry, 2011). There are also other reasons, besides the growing population of mobile devices and apps, for advertisers to be interested in appvertising. One is its apparent effectiveness. The recall rate for ads seen inside apps is higher than that for ads seen while surfing the mobile web at large, 52 vs. 40 percent. Another is the relatively stable audience share for in-app ads on iOS and Android platforms during much of the day, from early morning to almost midnight; by comparison, the audience shares for ads on TV and the Internet tend to rise for only a few hours in the evening but remain much lower during most of the day (Flurry 2011). Anticipating the growing demand for appvertising, developers also show an increased interest in appvertising revenue model, from 27 to 43 percent between 2010 and 2011, on par with their interest in in-app purchase revenue model.

In-App Advertising Infographic -- BuySellAds.com

Not all apps are a suitable candidate for appvertising. Most suitable are apps that are still in use long after being downloaded and used frequently (e.g., weather and news apps plus some popular games and “cannot do without” utilities). Those “sticky” apps can help generate a large number of (app) lifetime ad impressions. Least suitable are “gimmick” apps that are low on both dimensions (length of usage and intensity of usage).

Types of Apps Suitable for Appvertising

Paid, Free and Freemium

The revenue models above can be described as direct models where developers make money directly from their apps either through paid downloads, in-app purchases or in-app advertising. The pay-per-download model applies to paid apps whereas the in-app models apply mostly to free apps. These free apps are not exactly free but rather “freemium” (“free” + “premium”). A key characteristic of freemium products is that most users can have them for free while only some users pay (e.g., for advanced features and additional content). It is often necessary for “experience goods”, which apps are, to be offered as freemium products. Experience goods are those consumers need to use for some period of time before being able to determine their value and would therefore be reluctant or unwilling to pay for them up front. “Free” is an emotional hot button that immediately reduces the mental barriers for consumers by giving them a feeling of having nothing to lose. The freemium model works best when the products are “phenomenal” – having something to amaze users and hence to prompt them later to pay for the upgrades (Shmilovici, 2011).

There are also free, not freemium, apps where their developers do not intent on monetizing them directly. Instead, these free apps are designed for the purpose of engaging customers, building business relationships and accomplishing other marketing objectives. They are known as “branded apps” because they are individually tied to a specific brand. Some of them may cost money to download (e.g., Kraft charges $0.99 for its iFood Assistant app that features recipes and cooking tips), not unlike paid apps, but generating revenues directly from paid downloads is not their primary purpose, marketing is (e.g., 90 percent of iFood Assistant users, many among them are men, also go to register at Kraftfoods.com, helping Kraft not only to promote its products but also to reach a broader consumer base beyond its traditional audience of women) (Northcott, 2010). As more companies are getting interested in offering their branded apps, the number of these apps is going to grow rapidly. The next post in this series will look more closely at them.