The App Business Blog

This week marks the 5th anniversary of the launch of Apple’s App Store. It’s been quite a ride!

On launch day I was fortunate to have 5 of the 552 available apps be ones that I had developed for my clients. Being involved in 1% of the total App Store inventory was an amazing start to a new career, and crazily enough I was able to keep up with the pace of the App Store growth, for a while. Then things quickly began growing exponentially.

Looking back it would have been impossible to predict that in just 5 short years the 552 apps would grow to over 900,000. One of the first App Store best sellers was Super Monkey Ball by Sega, and they netted $3 million in the first month. Today the best grossing apps take in almost as much per day.

 

Today

Perfect for games

I don’t think Apple set out to create the perfect marketplace for games with the App Store. But looking at the App Store today, that is what has happened. With a few exceptions, all the top grossing apps are games. What makes the App Store so perfect for games is the lack of friction of downloading (mostly free) apps and then making micro payments inside the apps. This combined with the genius idea of consumable in app purchases, which are practically tailor-made for games.

The ongoing revenue generated by these purchases can fund ongoing app development and serious marketing budgets.

Great for brands and non-app businesses

Companies that don’t rely on app sales or in app purchases for revenue also love the App Store. They enjoy the frictionless, and free distribution of their apps. To the company, building an app is often a marketing expense. And in many cases it’s relatively cheap compared to their other brand advertising.

What about other app categories?

The App Store of today is not so great for productivity apps that require ongoing development and support, while at the same time they can only charge a one-time fee for the sale of the app. Consumable in app purchases are in most cases not appropriate for these types of apps. Apple even restricts the IAP business models that they allow on the App Store, making it difficult to innovate in this area.

Consumer acceptance is another challenge. It’s widely accepted to pay for shortcuts, power ups, virtual candy and all sorts of items inside a game. But a productivity app that tries to eek out a few more pennies beyond the initial purchase is often panned in reviews.

But is it in Apple’s interest to help these “poor” developers? In the short term it will probably not lead to more hardware sold. But if the best developers leave the platform because their business model was not compatible with the App Store, then there will be fewer “Only on the iPhone” apps, and Apple will suffer in the long term.

See Ben Thompson’s excellent blog series Why doesn’t Apple enable sustainable businesses on the app store? for more on this topic.

 

App Store is just a feature

When the App Store was launched five years ago it was a brilliant innovation (or if you will, a brilliant execution of several existing ideas). The success of the App Store has spawned a $10B+ industry. But today, launching an app store is not enough to achieve success.

Any new technology/gadget platform needs to launch with an app store. That’s what customers expect today. The app store is a feature on a checklist that has to be checked off. The bigger picture is the platform ecosystem. Here is where Apple still has an advantage with its integrated software and hardware, and a rabid following of developers.

Maybe this helps explain why Apple this week withdrew their lawsuit against Amazon for the use of the term “app store”.

 

The Future

Based in the past five years it’s impossible to predict what’s going to happen with the App Store in the next five. So like a good Internet pundit, I’ll expand my views on the obvious…

What is good for Apple?

Apple initially stated that their goal with the App Store was for it to break even financially. As Horace Dediu has shown, the iTunes Store is now clearly in the black, contributing about $2 billion to Apple’s bottom line. That would be a fantastic business for most corporations. But when compared to the billions that Apple makes from iPhone hardware sales, the App Store is a very thin layer of icing on top of the large hardware sales cake.

So when predicting how the App Store will evolve, I think it helps to keep this question in mind: Will the change help Apple sell more hardware?

Discovery

With over 900,000 apps in the App Store, everybody is in agreement that app discovery is a huge problem. It is also a problem that is impossible to solve to everyone’s satisfaction, because obviously each app developer wants it to be easy to discover their apps.

There was a brief flicker of hope earlier in the week when suddenly all the Top Charts disappeared from the App Store apps and in iTunes. But this was probably just a temporary glitch, and we’re stuck with the top charts for a while longer. Even though there are many good reasons to abolish the top ranking lists and replace them with something better, the inertia of the marketplace that has grown around them will make any radical changes difficult.

Let’s look at app discovery from Apple’s point of view: Will fixing this problem help Apple sell more hardware? In the short term I would say no. Apple can brag about the hundreds of thousands of apps in the App Store and all the apps that are exclusive to the iOS platform. This helps sell hardware. A customer can search the App Store for almost any conceivable task and find something to download. So for the most part the iPhone customer is happy.

The party that loses is of course the app developer that had developed the perfect app for the customer’s query, but it was not found, resulting in no sale. The number of potential customers for each app that the App Store brings is so large that many developers still make enough money to stay in the app business. But over time, many will call it quits because they are not able to sell enough apps. So in the long term, app discovery is something that Apple has to address or they will risk the App Store turning into a marketplace for just the top 100 developers.

More platforms

Apple wants to sell more hardware to their existing customers. Since most customers only upgrade their phone every so often and they only use one at a time (developers excepted of course), Apple has to launch new device platforms. As stated above, these new platforms are very likely to launch with App Stores.

They way a customer will interact with an App Store may differ if the device is an iWatch or and Apple TV. But it’s in Apple’s interest to provide a marketplace for app developers to make money on these new platforms.

Capture more payments

In app purchases was a genius idea when it was introduced 4 years ago. (At the time I optimistically predicted that in app purchases would add a mere $1B to the App Store business for Apple…) However it remains limited to purchases that enhance apps. And there are probably very good business and liability reasons for this limitation.

But since Apple sits on one of the largest hoards of credit cards on file in the world, and one of the more efficient systems for processing micro payments, it would be tempting to also handle payments outside the scope of apps. To take on PayPal, Square and other payment processors head on.

Would this help Apple sell more hardware? Not directly. But once you get used to using your iPhone for all your daily payments why would you switch to a different brand?

Note that this does not have to depend on NFC, which seems to be stuck forever in chicken-and-egg mode. More thoughts on this in a future blog post.

Always changing

The App Store and the app business around it, are always changing. What created success five years ago, doesn’t work today. Some of the cutting edge techniques from just a few months ago, don’t work today. This is what makes this business so exciting. But it can also be a bit overwhelming. If you need help or some coaching, get in touch.

I can’t wait to see what exciting things the App Store will bring us in the next five years!

written by Nick