The freemium business model, which relies on in-app purchases, is where the market is going, according to a recent study by IHS.
The app business is increasingly banking on the notion that virtual currency in a game could be worth real money--and a lot of it.
In-app purchases, which include virtual cash, weapons, levels, or extra features, are poised to dominate app revenue in the coming years, according to research firm IHS. In-app purchases already accounted for $970 million in sales last year, or 39 percent of the market. By 2015, that figure will grow to $5.6 billion, or 64 percent of the market.
"In 2012, it will become increasingly difficult for app stores and developers to justify charging an upfront fee for their products when faced with competition from a plethora of free content," said Jack Kent, an analyst at IHS. "Instead, the apps industry must fully embrace the freemium model and monetize content through in-app purchases."
The increasing popularity of freemium apps underscores the reluctance of consumers in paying upfront for an app--even when the fee is nominal. The new model, however, also relies heavily on the quality of the experience, spurring a number of smaller purchases down the line.
These purchases could include new levels or capabilities in a game, or a new filter for a camera app. The most popular in-app purchases have been for virtual currency, which can be spent on other virtual items in the game.
So far, games have been the primary example of apps using the freemium model. But other app categories will follow, IHS said. Other examples include access to dating and premium social networks.