App Store maths: When is a billion not a billion?

David Braue
18 May, 2009
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One billion is a very, very big number. Unless, of course, you’re talking about government stimulus packages, in which case it’s pocket change. But for now, the billion I’m referring to is the figure Apple says its App Store reached on April 24, after one lucky 13-year-old snared a nice prize pack for downloading the one billionth application three weeks ago.

Ironically, that app — Bump — is free and the sale produced no revenue for Apple. But the one-billion milestone is an emotional victory at the very least, providing the sort of wow-that’s-impressive buzz we get when we read about a movie like ‘Star Trek’ pulling in $US76.5 million in box-office receipts during its first three days.

Yet while Trek’s box-office victory portends a financial windfall, Apple’s milestone is somewhat less certain. Sure, iPhone and iPod touch owners may have downloaded a billion applications, but nobody’s saying how many of those were paid for – and for how much. As in the movie world, which probably has 50 flops for every blockbuster, most apps are languishing in obscurity despite tales of overnight App Store millionaires.

Clearly, profit in the App Store world isn’t guaranteed. Indeed, Jeremy Lieu, an analyst with venture capital consultancy Lightspeed Venture Partners reckons there’s the App Store is still a relatively minor concern. Doing some back-of-the-napkin maths that include an assumed average price of $US2.65 for paid apps and estimates of a 1:40 paid-to-free app ratio, Lieu recently concluded that the entire billion sales had generated gross revenues of just $US70 to $US160 million, which would translate into $US20 to $US45 million in Apple’s pocket.

Sure, it’s money, but it’s a far shot from big impressive numbers like 1 billion. Yet not everybody is so restrained in their App Store predictions: mobile marketing firm Mobclix, for one, believes the App Store will be generating $US1 billion over the next two years, with even this figure said to be “conservative”.

To support its argument, Mobclix offers figures including a suggestion that free top-25 App Store apps are downloaded 3000 to 15,000 times a day, while paid top-25 App Store apps get 2500 to 5000 downloads per day. That’s quite a range, particularly since the App Store is extremely top-heavy and the majority of apps outside the top 100 (listed in iTunes) would see a fraction of that volume. However, this varies by category: one developer I spoke to recently, who authored a #2-ranked travel application, was selling only one or two dozen copies per day.

Lack of concrete information about the App Store’s real volumes and prices means we’re left making largely uneducated guesses about how much the model is actually worth.

Lightspeed’s figures are likely skewed by a paid-to-free app ratio that seems to assume there are far more free apps than there really are. Indeed, at the time of writing, App Store tracker Apptism is tracking 9824 free and 31992 paid applications, which a 1:3 ratio that would suggest a far stronger role played by paid applications.

Mobclix used these numbers for its analysis, but its forecast is based on a 38% monthly growth rate. That sort of growth could be hard to maintain in the long term – yes, even for Apple.

Apple’s latest quarterly results offer no real clarity, so we’ll all be left guessing as to how many are being sold, and what revenue they’re actually generating. The only indication we’ve had so far of App Store revenues came last year when Steve Jobs said the company was selling $US1 million a day worth of applications and had pushed out $US30m in its first month. Those figures reflect bottled-up enthusiasm, of course, but they were also generated by a much smaller user base so one can only assume things have picked up from then.

Games = money. Or have they? And why does it matter? Well, developers considering building iPhone apps – and there are a few out there – obviously need to consider commercial returns before ploughing tens or hundreds of thousands of dollars into a mobile app. This need will be even more pointed as iPhone 3.0 emerges, generating new interest in the platform and opening up its possibilities as a gaming platform to rival the market-dominating Nintendo DS.

Games = money. Why does this matter at all? Well, developers considering building iPhone apps – and there are a few out there – obviously need to consider commercial returns before ploughing tens or hundreds of thousands of dollars into a mobile app. This need will be even more pointed as iPhone 3.0 emerges, generating new interest in the platform and opening up its possibilities as a gaming platform to rival the market-dominating Nintendo DS.

Nintendo’s software distribution model may be far more closed and offer far fewer titles, but I’m guessing those titles generate a fair bit of revenues for the company: our friends at Wikipedia tell us Nintendo has moved 567 million DS games, at retail prices ten to twenty times higher than Apple’s App Store games.

Of course, it has higher manufacturing and distribution overheads, so profit margins will be a lot slimmer than Apple’s. But the DS figures are instructive as a point of comparison both for putting the 1 billion figure in perspective, and for showing the opportunities that await Apple if it can build out the iPhone’s credentials as a serious gaming machine (perhaps by offering a game-controller overlay with buttons and an X-pad) rather than one that happens to have some excellent (and many very ordinary) games.

Everyone loves games, and it’s fair to presume a large proportion of the paid App Store sales are games. Yet in the long term, it’s anybody’s guess how much that could translate into. If Lieu is correct and the App Store really isn’t generating that much revenue, developers may ultimately temper their investments once the initial euphoria of iPhone 3.0 has worn off.

The App Store future. For now, it seems Apple is probably making far more money from the sales of iPhones and iPod touches than from the apps it sells customers to run on them. That’s a big change from the classic razors-and-blades business model, in which devices are sold at cost or at a loss to spur sales of content.

There clearly isn’t enough money moving through the App Store for Apple to all but give away the iPhone. Is that bad? Perhaps. By the time the App Store pushes towards the 2 billion mark, increased competition and customer ennui may have whittled down the iPhone’s growth to more normal levels and clarified more modest revenue expectations in the long term.

Of course, by then we may have another new computing platform – for example, a touchscreen netbook that can also pull down apps from the App Store. Heck, why stop there? I wouldn’t rule out a feature in iTunes 9 that allows customers to buy and download commercial Mac OS X apps through the App Store – the value being that customers can buy apps using easily obtainable iTunes credits rather than having to use their own credit cards online. This could make even desktop users more likely to test out and buy new applications that they ignore because buying online presnts a mental barrier.

Apple has many options to pursue further growth for the App Store, which if nothing has proved itself customer friendly and effective. Going forward, the real challenge will lie in how effectively Apple can convert the platform into a more efficient revenue-spinner, for iPhones and beyond.

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