Apple's App Store: An economy for 1 percent of developers

Just because the App Store is huge doesn't mean it makes sense to build an app.

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Editor's note: This a guest post by Igor Faletski, whose bio is below.

Since the Apple App store opened on July 10, 2008, it has paid out more than $4 billion to iOS developers --70 percent of the $5.71 billion it has booked in revenue.

Pretty big numbers, right?

Well, yes and no. Yes, those are big numbers that make my head spin and dwarf my personal tax return. At the same time, the real answer has to be no.

In the mobile commerce world, $4 billion is significant, but it's not a headline. It's more of a line item on a table that includes some much bigger numbers.

For example, in 2011 alone eBay accounted for $5 billion in mobile sales, double its 2010 mobile sales. Gartner projects mobile commerce will be a $31 billion market by 2016, with consistent growth of 39 percent compounded annually.

The Apple App Store will certainly be part of the mobile commerce ecosystem, but it will be a small part that shrinks proportionally over time for the following reasons.

The profitable Apps are free games
Digging deeper into the numbers from the Apple App Store reveals that the apps making money are overwhelmingly free games selling virtual goods.

A reasonable guess would be that 75 percent of the payouts from Apple to developers are for games, since that's typically the percentage of games in the top 100 grossing apps. Apple promotes in-game virtual good purchases because it gets a 30 percent cut of every one of those virtual good dollars if you use their payments platform.

Unfortunately, the profitability of free games with in-app purchasing creates a destructive, hit-driven cycle that locks out small developers. The successful big studios, with multiple repeat hits, monopolize the discovery mechanisms, rankings and reviews by using all sorts of proven tactics such as incentivized downloads.

The system works for a few big players and outlier hits, but the playing field is definitely tilted in favor of the incumbents.

As entrepreneur Tony Wright says in his post How to Evaluate a (paid) iPhone App Idea, "The App Store is really mostly a game store. And a free game store at that."

Apple's walled garden
The SDK and developers tools for iOS devices are excellent. No argument. But in exchange for this boost to developer productivity, Apple expects its pound of flesh.

Want to use Apple iTunes as the payment method in your app? Say goodbye to 30 percent of your revenue. This makes credit card interest rates look generous. It also makes any type of businesses without enormous margins (more than 50 percent) impossible to run in the App Store.

Apple controls the App Store and runs it with an iron fist. Payments for your app may be late and you may be forced to sue Apple to get them. Your app may not make it into the store. Your app may be kicked out.

And once you get the 70 percent you're owed from Apple? You now likely owe sales tax. If this is starting to sound a lot like digital serfdom, there's a reason.

If developers want to see what the future looks like when you cede control to Apple, they can look at the music industry. It's now beholden to Apple as the gatekeeper to iTunes and the entity with control over access to their most coveted market.

The open Web
Remember the Web? Right. It was the biggest thing in the past 20 years of business. Now the mobile Web is growing eight times faster than the Web grew, according to Google.

The open mobile Web is larger than the world of apps and growing faster. The mobile Web supports all the ingrained Web habits we already have. Search, e-mail and social media all just work already in the browser--the browser that everyone already has installed on their device.

But the mobile Web is missing some key tools, infrastructure, libraries, and examples for developers to use and build a better future. This is the problem my company and many other companies are solving. We want to see an open world view beat a closed world view, again.

 

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