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Full Analysis of iPhone Economics: Bad News?

144 points by yewweitan 16y ago

4chan4ever 16y ago
The profit potential on the desktop and the pure web has always outstripped what iPhone apps are capable of. If it's a labor of love or if you just love Apple, by all means, develop for the iPhone. If profits are your goal, the iPhone is a severely limiting choice, for freelancers especially.
illumin8 16y ago
His entire analysis is basically taking the revenue total for all apps, divided by the number of apps, and saying each developer only makes an average of $3k per year. Sorry, this is not a good analysis. Some people give their apps away for free. Some quality apps make millions. This doesn't mean the opportunities are not there. A similar analysis could be done of PC shareware software authors, with similar results.
- jroes 16y ago
  He has data that indicates 73% of total apps on the store are paid. He then bases his remaining calculations on that paid app number.
  - wallflower 16y ago
    Count of total apps paid compared with Count of total apps free has probably very little correlation with app store revenues. The best case (equal sharing) isn't realistic, as we all know that some apps generate hundreds of thousands of dollars over their lifetime. > So the best case of how few apps get to divide that 1.43 Billion dollars over the past 2 years, is 164,000 actual apps
  - metageek 16y ago
    Yeah, but he doesn't take into account the fact that 73% of apps do not get 73% of the downloads.
    - sorbus 16y ago
      However, paid apps do get all of the purchases. The number of downloads doesn't matter, only income does.
      - smokey_the_bear 16y ago
        Free apps have in app purchases, and ads. Some developers do very well off of free apps.
        sorbus 16y ago
        Ads, until the introduction of iAds, would not have gone through apple, and therefor would not count towards total revenue. You do have a point with in app purchases, but I doubt that they would significantly skew the numbers - they would make them worse for developers of paid apps, in fact. Given the other optimistic decisions the article has when dealing with numbers, I think that ignoring in app purchases fits with it: it's a best case scenario for paid apps. It would be quite interesting to see how much money has been made through in app purchases, though. Not merely anecdotes, but the percentage of free apps which have in app purchases, and the average/median income through in app purchases in those apps.
- chops 16y ago
  Nope, that's not what it is. He explicitly states that he excludes the free apps in the revenue analysis. He uses a combination of numbers from Apple and from other 3rd party services to come to the median revenue per paid app at something like $680/year. He also fully acknowledges that there are some extreme examples that make it big, but that half of all paid apps are currently making less than $680/year. This is a pretty thorough analysis.
  - warfangle 16y ago
    Then there's also the point that while some extreme examples made it 'big,' in the long run of things mobile, 3M downloads really isn't all that big.
    - chops 16y ago
      Indeed. That part was quite fascinating and puts things into perspective. Target big to win big.
AlisdairO 16y ago
I'm not sure I buy that a typical iPhone app costs $35,000 to develop. Considering the simplicity of most apps, combined with the fact that many apps are effectively the same program with some content alteration, it seems like a really inflated figure.
- pvg 16y ago
  It doesn't really make much difference, for the purposes of his analysis. Let's say a typical app costs $1500 to develop. If his other numbers are right, that typical app would take about 2.5 years to break even. His argument is that, on average, developing an iPhone app is, in itself, a fairly dismal economic proposition.
  - mgkimsal 16y ago
    However, making, say, 80, spending time promoting them, and perhaps having a few of those be moderate successes may make this a much more viable option. I have a friend who's pursuing this option of making multiple apps (not sure he's to 80 yet, but will likely surpass that in the next year). I agree, the chance of one app being the runaway success that affords one an early retirement is pretty remote, but the tech press loves to promote the huge success stories, and many others love to follow them.
    - pvg 16y ago
      If you are making 80, or even 20, chances are you're not really making apps but repackaging offline or online content in the form of an app and that's a rather different niche. It's also one that Apple is making efforts to squish, although I'm sure it will continue to thrive on Android and other non-restrictive markets.
      - mgkimsal 16y ago
        I can say that in the case of my friend, it's not repackaged content, but actual real apps. They tend to be somewhat on the basic side, but are nonetheless 'real' apps in the sense of having real hand programming behind them and such. FWIR, he's using Titanium, which makes it pretty easy to do basic apps fast (but still native apps all the same). Whether Apple will continue to let Titanium exist on the iOS platform is a whole other question :)
hackermom 16y ago
"Now the heartbreaking news. Lets factor in our development costs. Again, independent source, the Internet Retailer reported on May 1, 2010, that most apps cost between $25,000 and $50,000 to develop." These numbers were really taken out of the ass of a troll.
ThomPete 16y ago
I don't understand how this is any different than if you did an analysis of Startup Economics. In any space with great competition and where your product is scalable, few will make enough money to justify their investment. Also many paid apps are part of a bigger picture, the iPhone app is not the only revenue stream they have. That's reality, now deal.
rpledge 16y ago
Interesting analysis, but I'd like to see the numbers for apps that are actually maintained and marketed vs. some guy who hacked up an app and never fixed any bugs or improved it based on feedback. I suspect the number get better if you filter out the crappy unmaintained apps (but of course, this isn't an easy data set to obtain)
- Manfred 16y ago
  I agree, there are a lot of apps that didn't take the developer more than 5 hours to put together. Earnings made by well made apps is probably much higher.
  - Retric 16y ago
    Yep, Half of all developers will earn less than $682 per year assumes the average developer produces 1 app. Also, most apps revenue falls off over time so a more realistic number is 80% 682 * 2 probably 1091$ in the first year and 272 in the second. If someone is churning 20 in a month and then getting 1364$ * 20 = 27,280$ over two years for one months work that's not bad. PS: The average app has probably only been out for 1 year so it may be reasonable to double these numbers. Basically, anything released yesterday is unlikely to have generated much revenue, averaging ALL apps over a 2 year earning period is silly.
briancooley 16y ago
"Full Analysis" seems like a bad title for this post. First off, in app purchases are not included. Secondly, his argument against free apps is simply that the reach is smaller than other platforms. Finally, he acknowledges that the median paid app get fewer than 1000 downloads. The 25-50K number for development costs is way off for the median app. Something like $5K-$10K is more in line for most of the apps I'm seeing (but I work cheap), and I've done a couple small ones (probably more representative of the bottom half of the distribution) for clients in 3 days' time.
- roel_v 16y ago
  None of this refutes his point, which is that developing for iphone is a suboptimal use of marketing/advertising dollars. Even if you'd assume his numbers had a 100% error margin, you still couldn't get iphone apps to work.
  - briancooley 16y ago
    His analysis of free apps doesn't really do that segment justice. He totally ignored the mobile ad network space and addressed only a portion of what the market seems to be by focusing on Hilton and Walgreens. I'm not sure those cases are worth refuting.
    - alttab 16y ago
      Did you even read the entire post?
      - briancooley 16y ago
        Yes, I did. What I was expecting to see for free apps was something along the lines of using, say, AdMob metrics (http://metrics.admob.com/ http://metrics.admob.com/) and his estimate of the number of free apps to come up with some rough idea of what the average iPhone ad-driven app makes as revenue. That would have been more in line with the section of the post about paid apps. Simply saying that targeting an iDevice leaves out 97% of the total population might be meaningful to an advertiser trying to gain a wide reach, but it means less to a developer, who is mostly interested in 1) getting an app installed on the device and 2) getting impressions. The fact that the average iPhone user has downloaded 80 free apps is a good thing for a developer.
DougBTX 16y ago
It seems like the expectations are very high for the App Store, so perhaps this article is just a reaction against hype. But, don't we say that only one in ten start-ups makes it? So, as a baseline, why expect more than one in ten apps on the App Store to be profitable?
- blacksmythe 16y ago
  Because in a start-up the one in ten that makes it makes the average effort worthwhile. (That is how VCs make their money)
bensummers 16y ago
It'd be interesting to see a comparison to "traditional" distribution methods, eg shareware, web apps, and so on. Maybe it's just that writing small software applications doesn't pay?
1gor 16y ago
Why does the author assume normal distribution (bell curve) for apps' revenues? In reality app sales are similar to those of books and follow power law distribution. A few bestsellers will account for large chunk of overall app sales. Then there will be a very long tail of unprofitable apps. Therefore all of his numbers and his final conclusion are wrong. People do not write iPhone apps in order to achieve some sort of 'average' income. They hope to strike it lucky and get a disproportionately large payoff.
- alttab 16y ago
  Where are you getting the normal distribution information from? "This is the average, remember, it is not the median. The average skews too high because of the long tail. There are a few who make several millions, who distort the average number, so it is not true that half of iPhone App Developers earn more, and half less, than $3,050 per year." He references the long tail you mention, and describe exactly what you mean about some people making a lot, but because of distribution and how users find and download apps - its more akin to say - the lottery - than actual market strategy. Some will make money. Most of them will be development/contractor shops that charge out-the-ass for mobile apps to companies who want a "mobile presence." These medium to large companies won't realize that the money they are losing isn't worth it until its happened a couple of times. Then they'll stop coming back. That said, independent developers making money on that app store directly is a complete crap-shoot. Very few get rich, lucky ones make a very modest living, more get a hobbyist return, most get dick - and some don't even get the money they did earn from Apple. Therefore all of your rebuttal and final conclusion are wrong. How many books have you written on the subject? Note: The reason he uses a normal distribution is because it would actually help DISPROVE his thesis, a normal distribution would make it easier for an app developer to make money, not harder. When the normal distribution showed a shitty return - he reminded us it was actually worse.
  - NyxWulf 16y ago
    Unfortunately that's not necessarily true. A normal distribution is just vastly different than an exponential distribution. Using the central limit theorem allows you to expect the mean to be normally distributed around your samples, but that's about all. The reality is that taking an average over an exponential distribution is largely meaningless. There are an infinite number of distributions that would create that exact mean. Some of them not at all profitable for certain apps, others very profitable. The problem with using an average over this distribution is that it doesn't give you anything to work from. You can't figure out who is profitable and who isn't, or how high up the curve you need to be to be profitable. Taking an average over all of the apps in the app store is like taking the average revenue of every website that tries to make money on the internet. It's a meaningless number. At the end he compares the low numbers in averages to a single anecdotal example of something that had a 100 Million downloads. On the one hand he dismisses the few highly successful appstore apps but then uses another singular example of a highly successful app to recommend a different platform. Overall the methodological approach is deeply flawed. I could go on, but ultimately, I found this analysis not very insightful. As with any new channel, it takes some time to figure out what works and what doesn't. Who is going to buy and who isn't. In almost all software the distribution is exponential where the top 10 to 20% make over 90% of the revenue. The same is true of the app store. It all comes back to fundamentals. Find an unmet or under-served need in the market, figure out how big that market is, figure out how much it's going to cost to fill that need, make sure your app fills the need, and start trying to sell it. Then once you've built up a sales platform, then you start scaling it.
adolph 16y ago
"former Nokia executive" [number froth] "What I have been telling my readers and followers and this blog and in my books, that the real money is in true mass market services like SMS, MMS and WAP. That is where the REAL money is." This guy makes a strong case for skating to where the puck used to be.
- MicahWedemeyer 16y ago
  I'd say there are a lot of pucks, and he's suggesting skating towards some of the less sexy ones. The app store is shiny and new and fun for hackers, but his point about market size is pretty valid. All iphones are SMS-capable. Not all SMS-capable phones are iphones. Just like Twitter never killed blogging, smart phones still haven't killed plain old dumb phones, either.
  - adolph 16y ago
    Verily, there are many pucks. It is pretty funny that the author includes WAP as one.
WilliamLP 16y ago
Some people seem to assume that building a profitable app is entirely about luck, and not about having the insight and ability to develop something better than what is in the store currently. Many of these app are developed by beginners and casual hobbyists and, frankly, just aren't very good. Thinking you can work to be in the top 10% of this crowd isn't necessarily unrealistic.
- praptak 16y ago
  Fair enough. How much does the last app in the 10% make?
xenophanes 16y ago
> Half of all developers will earn less than $682 per year. Do you still think this is a good business idea? I'm one of those developers. And do you know why? Because it's not my business. I wanted to make some apps. I didn't put in a huge effort. For the numbers to mean anything, you should filter out the 90% (or whatever) of apps that aren't intended to be part of a serious, profitable business.
- pvg 16y ago
  The numbers, assuming his inputs are reasonably accurate, still mean something - most people trying to make money selling iPhone apps don't make a great deal. It's easy to distinguish between apps that are trying to make money and apps that aren't - apps trying to make money are not free. The sort of filtering you want is next to impossible - you're asking that only the apps that are trying to make money but really mean it are to be considered. He doesn't address something that maybe you're touching on, indirectly - unlike the markets where someone makes zillions on SMS voting for a popular TV show or selling Tetris to feature phone users, the iPhone app market is very accessible to J. Random Hacker. Compared to the previous age of mobile development, it's a major improvement - same device (more or less), same screen size (more or less), same framework, no complicated permission needed from the carrier, payment taken care of, etc, etc. Plus, you never hear of anyone saying they program J2ME or BREW or Symbian apps for fun.
  - xenophanes 16y ago
    > [all] apps trying to make money are not free. No, 3 of my 4 apps are paid, even though I'm not making a serious effort to make money. Why shouldn't they be? I don't mind making a little money. Just because filtering the numbers to get useful results is infeasible doesn't mean we should pretend averages across the entire store mean anything for a person who sets out to build an app store oriented business. It reminds me of all the psychological studies that use inadequate controls just because adequate ones for what they want to do would cost trillions of dollars. Then they claim to have done legitimate science. But the standards of science don't lower themselves to what data we can easily get.
krig 16y ago
This sounds very much like the way things worked when I was working in the AAA games business as well. >90 percent of all titles are lossleaders, and the few that are hits make up for the lost money developing the others. My guess is that most branches of entertainment are similar. Movies, TV, music etc. There's no such thing as a steady, guaranteed income when it comes to things like this (in my experience/opinion). That doesn't mean making apps is not a viable business. Just not for everyone who tries.
- aero142 16y ago
  Unless you are Pixar.
loewenskind 16y ago
I thought it was already understood that the model of "create a $1 app and sell 10k of them per month" was long over. The App store is still a relatively new market, so people will continue to learn how to be successful on it. I just got an iPad and started using the App store for the first time in my life and guess what? Out of the 5 things I wanted to use the pad for, 3 of them didn't exist at all. There is plenty of space in this market I would say. Just not for iFart anymore.
- mgkimsal 16y ago
  Care to share what those 3 things were you want to do but can't find apps for?
  - loewenskind 16y ago
    I would, but I'm busy building them. ;)
- 3pt14159 16y ago
  I'm also curious as to what you wanted to see. When I picked up my friend's iPad (a month or two ago) I struggled to find a good finance app that actually gave good charting and numbers for stock market options and commodity futures. I know I'm not the only one who would be interested in that AND I know that those of us who are have fairly deep pockets.
  - loewenskind 16y ago
    Yea, in my experience it seems the apps are pretty focused. There are a lot of games, a lot of toys and a lot of professional made apps in specific areas (e.g. drawing/photo editing).
pchristensen 16y ago
When reading this, it helps to remember that the author is a former Nokia executive that does consulting and speaking to Big Business. He mentions Hilton Hotels, Rite Aid, and Walgreens. I don't know how you would split out Brand apps vs hobbyist vs junk apps, but he should have mentioned that. I'd be surprised if there are more than 10K Brand apps like the ones he appears to be most familiar with.
deleted 16y ago
[deleted]
mtholking 16y ago
I don't care for the 35k iPhone App and 3k WAP site numbers that he pulled out of thin air. From my experiences, the costs are not so disparate. iPhone vs. WAP is a poor comparison because an iPhone app and a WAP site are two different digital tactics that address completely different objectives. Brands are not buying iPhone apps to get the same utility that is available from a WAP site. They are buying them to make their brands appear technically savvy, and to increase engagement.
lecha 16y ago
For the sake of argument, let's assume the analysis is off by two orders of magnitude (i.e. assume half of businesses will earn less than $70K per year). Can anyone justify an investment in development of an iPad-only productivity software? Do you think a startup can raise capital based on such economics? My takeaway: Selling AppStore apps/ads isn't THE business model. It should be one of the channels amongst others.
1053r 16y ago
I think a lot of us are instinctively reacting negatively to this article, and I don't think it is because it's news we just don't want to hear. There is one point that the author fails to take into consideration: future growth. Anyone who has used iPad or iPhone or an Android device can tell that devices like these, not Symbian or WAP or Brew or whatever, are the future. Those other platforms might catch up, but for now they lag abysmally behind in terms of user experience. And so while they might outnumber iOS and Android for now, that numerical advantage can not last. Walk around a Y-Combinator event (or CES, or E3, or anywhere else where leading edge alpha geeks congregate) and count phones. I'd be willing to wager a lot of money you'd see a bunch of iOS and Android devices, a few blackberries, and a smattering of ancient nokia and samsung free phones held by users who "just want to make calls" (and thus aren't going to be reachable by any apps at all, WAP or Java or otherwise). So, yes, a company developing an app today for iOS or Android isn't going to make their money back on the platform as it stands in any reasonable amount of time. But a company or developer who positions themselves to be on top of a platform that is rising meteorically (and will displace literally billions of feature phones over the next decade and a half as moore's law drops silicon costs by a factor of 1000) is going to do well. Hype is about future expectations. When expectations rise above exponential growth in our industry, those expectations usually turn out wrong. But the mobile market has a current penetration of over 3 billion people and I'll wager practically every phone on the planet will be a "smartphone" in under 15 years. That's a lot of headroom for growth.
char 16y ago
My main issue with this article is that the author assumes that all developers operate equally. He averages the individuals who build apps in their spare time and might make thousands of dollars as 'extra' income, with the large app companies who spend tremendous resources on building apps that get high returns. When he crunches his numbers, he gets results that are probably very far from the actual reality of things.
- ww520 16y ago
  He is an ex-executive. What does he know about software development?
rfolstad 16y ago
How is this bad news? The consulting firms charging 35K per app are making a killing!
vessenes 16y ago
It's interesting that he's a big business guy. I would restate his title as: "the Apple store is for suckers or smallfry, if you're a big company." And, he's right. Big companies do take $50k+ to create mobile apps. Big companies do have much better things to do with their money; they can add far more value at greater scale. Of course, Jane developer might not be in the same boat. Another interesting confounding variable: he clearly conceives of developers as 'one-app' developers. And, he's right that this doesn't pay on the apple store. There is just, frankly, some randomness in which apps tip on the store -- most developers have figured this out already, and of course Apple gives links so that developers have an easier time cross promoting.
- yewweitan 16y ago
  You're absolutely right. But where's the fun in a headline like that. More to the point, I think if you read the rest of his blog, and take the perspective of some of the larger international companies, going for gold with the iPhone won't be the best business strategy. Tomi has given some case studies of how MMS has worked for car dealers in Germany, and even campaign promoters in Australia. There is this under-exploited niche called mobile marketing, which relies on WAP, SMS, MMS, etc which could give pretty high ROI for large companies (eg: BMW) Especially if you take a B2B perspective, what he says makes huge sense.
  - vessenes 16y ago
    Yep, agreed completely. The Apple app store is a democratizing force.
Locke 16y ago
I'd have preferred to see a more detailed breakdown of apps. It may be a terrible market for utility apps. Or, for apps that are more feature than product. How many apps are truly products with solid business models? How do these apps do? Or, how does the picture look for games? Especially now that game developers can embrace a virtual currency / goods business model. They can get all the distribution benefits of being a free app while still making (potentially much more) money over a longer period of time. Or, do these apps not count as apps because they're too close to the web-based games that are doing so well on Facebook? If you're a developer, looking at industry-wide numbers is good, but it's better to research the apps in the niche you plan on entering.
halostatue 16y ago
I can't believe this guy because he claims that the iPhone 4 launch was a stumble. http://communities-dominate.blogs.com/brands/2010/06/smartphone-wars-update-mid-june-iphone-4-sales-stumbles-nokia-profit-warning-microsoft-os-confusion.html http://communities-dominate.blogs.com/brands/2010/06/smartph... What?
founderceo 16y ago
The analysis misses the point of why people get into mobile development. See http://bit.ly/iPhone-economics http://bit.ly/iPhone-economics
ww520 16y ago
His proposition of doing SMS app because the Idol/whatnot had made hundreds of millions is misleading. The cost of doing a SMS app might be low but the app itself is an accessory of the real product, the game show. It takes tens to hundreds millions of product and marketing cost to make and run a show like Idol over years. You think a $35,000 developed SMS app can make that kind of money by itself?
xcombinator 16y ago
I think this man doesn't get it, as a "former executive" he thinks anything in live is money. People write apps for iPhones because they dream to do what they love without working for the man. Of course it is only a remote possibility, but it is real. 99% of the people that went to California searching gold didn't find it, as in SouthAfrica, but the now deeper old mine was discovered by a solitary man looking for gold armed just with a mining pan. There is something in the human spirit that is as valuable as money that makes musicians painters, singers,movie makers or engineers that maybe won't get rich keep trying. Maybe they get to work on what they love. PS: I'm an iPhone App developer myself, since Linux Click an run app store I believed that a "right" implementation of an Appstore was going to be the future. I expected to be Apple the first to to this. In contrast with this executive they just seem to "get it". Steve Jobs is really smart in this too, when he creates something he diminish it, so the competitor's executives see an appstore and say: It's only a mere millions dollar market, not important. IBMs mainframes were the "important stuff", when real money was, mini computers were just "cheap" toys with no real application. People who wanted "job security" deciced to work with the "big boys" because it was safe... until it was not.
JVerstry 16y ago
Excellent analysis !!! Good job !!!
rmundo 16y ago
This article makes sense for you if you're the kind of company that needs 35k to create an app. In that case, sure, stay away from the app store. But for indie devs with a bright idea, the app store is a great opportunity to try something out for a very low cost. A very interesting space for startups, I'd think.
aneth 16y ago
This is an interesting analysis but a very flawed conclusion. What percentage of restaurant owners will make money? How about online entrepreneurs? Just because the expected value of building something is low doesn't mean it's a bad model. It just means you have to execute well and that most people fail.

144 points by yewweitan 16y ago

The profit potential on the desktop and the pure web has always outstripped what iPhone apps are capable of. If it's a labor of love or if you just love Apple, by all means, develop for the iPhone. If profits are your goal, the iPhone is a severely limiting choice, for freelancers especially.

illumin8 16y ago

His entire analysis is basically taking the revenue total for all apps, divided by the number of apps, and saying each developer only makes an average of $3k per year. Sorry, this is not a good analysis. Some people give their apps away for free. Some quality apps make millions. This doesn't mean the opportunities are not there. A similar analysis could be done of PC shareware software authors, with similar results.

jroes 16y ago
He has data that indicates 73% of total apps on the store are paid. He then bases his remaining calculations on that paid app number.
- wallflower 16y ago
  Count of total apps paid compared with Count of total apps free has probably very little correlation with app store revenues. The best case (equal sharing) isn't realistic, as we all know that some apps generate hundreds of thousands of dollars over their lifetime. > So the best case of how few apps get to divide that 1.43 Billion dollars over the past 2 years, is 164,000 actual apps
- metageek 16y ago
  Yeah, but he doesn't take into account the fact that 73% of apps do not get 73% of the downloads.
  - sorbus 16y ago
    However, paid apps do get all of the purchases. The number of downloads doesn't matter, only income does.
    - smokey_the_bear 16y ago
      Free apps have in app purchases, and ads. Some developers do very well off of free apps.
      - sorbus 16y ago
        Ads, until the introduction of iAds, would not have gone through apple, and therefor would not count towards total revenue. You do have a point with in app purchases, but I doubt that they would significantly skew the numbers - they would make them worse for developers of paid apps, in fact. Given the other optimistic decisions the article has when dealing with numbers, I think that ignoring in app purchases fits with it: it's a best case scenario for paid apps. It would be quite interesting to see how much money has been made through in app purchases, though. Not merely anecdotes, but the percentage of free apps which have in app purchases, and the average/median income through in app purchases in those apps.
chops 16y ago
Nope, that's not what it is. He explicitly states that he excludes the free apps in the revenue analysis. He uses a combination of numbers from Apple and from other 3rd party services to come to the median revenue per paid app at something like $680/year. He also fully acknowledges that there are some extreme examples that make it big, but that half of all paid apps are currently making less than $680/year. This is a pretty thorough analysis.
- warfangle 16y ago
  Then there's also the point that while some extreme examples made it 'big,' in the long run of things mobile, 3M downloads really isn't all that big.
  - chops 16y ago
    Indeed. That part was quite fascinating and puts things into perspective. Target big to win big.

AlisdairO 16y ago

I'm not sure I buy that a typical iPhone app costs $35,000 to develop. Considering the simplicity of most apps, combined with the fact that many apps are effectively the same program with some content alteration, it seems like a really inflated figure.

pvg 16y ago
It doesn't really make much difference, for the purposes of his analysis. Let's say a typical app costs $1500 to develop. If his other numbers are right, that typical app would take about 2.5 years to break even. His argument is that, on average, developing an iPhone app is, in itself, a fairly dismal economic proposition.
- mgkimsal 16y ago
  However, making, say, 80, spending time promoting them, and perhaps having a few of those be moderate successes may make this a much more viable option. I have a friend who's pursuing this option of making multiple apps (not sure he's to 80 yet, but will likely surpass that in the next year). I agree, the chance of one app being the runaway success that affords one an early retirement is pretty remote, but the tech press loves to promote the huge success stories, and many others love to follow them.
  - pvg 16y ago
    If you are making 80, or even 20, chances are you're not really making apps but repackaging offline or online content in the form of an app and that's a rather different niche. It's also one that Apple is making efforts to squish, although I'm sure it will continue to thrive on Android and other non-restrictive markets.
    - mgkimsal 16y ago
      I can say that in the case of my friend, it's not repackaged content, but actual real apps. They tend to be somewhat on the basic side, but are nonetheless 'real' apps in the sense of having real hand programming behind them and such. FWIR, he's using Titanium, which makes it pretty easy to do basic apps fast (but still native apps all the same). Whether Apple will continue to let Titanium exist on the iOS platform is a whole other question :)

hackermom 16y ago

"Now the heartbreaking news. Lets factor in our development costs. Again, independent source, the Internet Retailer reported on May 1, 2010, that most apps cost between $25,000 and $50,000 to develop." These numbers were really taken out of the ass of a troll.

ThomPete 16y ago

I don't understand how this is any different than if you did an analysis of Startup Economics. In any space with great competition and where your product is scalable, few will make enough money to justify their investment. Also many paid apps are part of a bigger picture, the iPhone app is not the only revenue stream they have. That's reality, now deal.

rpledge 16y ago

Interesting analysis, but I'd like to see the numbers for apps that are actually maintained and marketed vs. some guy who hacked up an app and never fixed any bugs or improved it based on feedback. I suspect the number get better if you filter out the crappy unmaintained apps (but of course, this isn't an easy data set to obtain)

Manfred 16y ago
I agree, there are a lot of apps that didn't take the developer more than 5 hours to put together. Earnings made by well made apps is probably much higher.
- Retric 16y ago
  Yep, Half of all developers will earn less than $682 per year assumes the average developer produces 1 app. Also, most apps revenue falls off over time so a more realistic number is 80% 682 * 2 probably 1091$ in the first year and 272 in the second. If someone is churning 20 in a month and then getting 1364$ * 20 = 27,280$ over two years for one months work that's not bad. PS: The average app has probably only been out for 1 year so it may be reasonable to double these numbers. Basically, anything released yesterday is unlikely to have generated much revenue, averaging ALL apps over a 2 year earning period is silly.

briancooley 16y ago

"Full Analysis" seems like a bad title for this post. First off, in app purchases are not included. Secondly, his argument against free apps is simply that the reach is smaller than other platforms. Finally, he acknowledges that the median paid app get fewer than 1000 downloads. The 25-50K number for development costs is way off for the median app. Something like $5K-$10K is more in line for most of the apps I'm seeing (but I work cheap), and I've done a couple small ones (probably more representative of the bottom half of the distribution) for clients in 3 days' time.

roel_v 16y ago
None of this refutes his point, which is that developing for iphone is a suboptimal use of marketing/advertising dollars. Even if you'd assume his numbers had a 100% error margin, you still couldn't get iphone apps to work.
- briancooley 16y ago
  His analysis of free apps doesn't really do that segment justice. He totally ignored the mobile ad network space and addressed only a portion of what the market seems to be by focusing on Hilton and Walgreens. I'm not sure those cases are worth refuting.
  - alttab 16y ago
    Did you even read the entire post?
    - briancooley 16y ago
      Yes, I did. What I was expecting to see for free apps was something along the lines of using, say, AdMob metrics (http://metrics.admob.com/ http://metrics.admob.com/) and his estimate of the number of free apps to come up with some rough idea of what the average iPhone ad-driven app makes as revenue. That would have been more in line with the section of the post about paid apps. Simply saying that targeting an iDevice leaves out 97% of the total population might be meaningful to an advertiser trying to gain a wide reach, but it means less to a developer, who is mostly interested in 1) getting an app installed on the device and 2) getting impressions. The fact that the average iPhone user has downloaded 80 free apps is a good thing for a developer.

DougBTX 16y ago

It seems like the expectations are very high for the App Store, so perhaps this article is just a reaction against hype. But, don't we say that only one in ten start-ups makes it? So, as a baseline, why expect more than one in ten apps on the App Store to be profitable?

blacksmythe 16y ago
Because in a start-up the one in ten that makes it makes the average effort worthwhile. (That is how VCs make their money)

bensummers 16y ago

It'd be interesting to see a comparison to "traditional" distribution methods, eg shareware, web apps, and so on. Maybe it's just that writing small software applications doesn't pay?

1gor 16y ago

Why does the author assume normal distribution (bell curve) for apps' revenues? In reality app sales are similar to those of books and follow power law distribution. A few bestsellers will account for large chunk of overall app sales. Then there will be a very long tail of unprofitable apps. Therefore all of his numbers and his final conclusion are wrong. People do not write iPhone apps in order to achieve some sort of 'average' income. They hope to strike it lucky and get a disproportionately large payoff.

alttab 16y ago
Where are you getting the normal distribution information from? "This is the average, remember, it is not the median. The average skews too high because of the long tail. There are a few who make several millions, who distort the average number, so it is not true that half of iPhone App Developers earn more, and half less, than $3,050 per year." He references the long tail you mention, and describe exactly what you mean about some people making a lot, but because of distribution and how users find and download apps - its more akin to say - the lottery - than actual market strategy. Some will make money. Most of them will be development/contractor shops that charge out-the-ass for mobile apps to companies who want a "mobile presence." These medium to large companies won't realize that the money they are losing isn't worth it until its happened a couple of times. Then they'll stop coming back. That said, independent developers making money on that app store directly is a complete crap-shoot. Very few get rich, lucky ones make a very modest living, more get a hobbyist return, most get dick - and some don't even get the money they did earn from Apple. Therefore all of your rebuttal and final conclusion are wrong. How many books have you written on the subject? Note: The reason he uses a normal distribution is because it would actually help DISPROVE his thesis, a normal distribution would make it easier for an app developer to make money, not harder. When the normal distribution showed a shitty return - he reminded us it was actually worse.
- NyxWulf 16y ago
  Unfortunately that's not necessarily true. A normal distribution is just vastly different than an exponential distribution. Using the central limit theorem allows you to expect the mean to be normally distributed around your samples, but that's about all. The reality is that taking an average over an exponential distribution is largely meaningless. There are an infinite number of distributions that would create that exact mean. Some of them not at all profitable for certain apps, others very profitable. The problem with using an average over this distribution is that it doesn't give you anything to work from. You can't figure out who is profitable and who isn't, or how high up the curve you need to be to be profitable. Taking an average over all of the apps in the app store is like taking the average revenue of every website that tries to make money on the internet. It's a meaningless number. At the end he compares the low numbers in averages to a single anecdotal example of something that had a 100 Million downloads. On the one hand he dismisses the few highly successful appstore apps but then uses another singular example of a highly successful app to recommend a different platform. Overall the methodological approach is deeply flawed. I could go on, but ultimately, I found this analysis not very insightful. As with any new channel, it takes some time to figure out what works and what doesn't. Who is going to buy and who isn't. In almost all software the distribution is exponential where the top 10 to 20% make over 90% of the revenue. The same is true of the app store. It all comes back to fundamentals. Find an unmet or under-served need in the market, figure out how big that market is, figure out how much it's going to cost to fill that need, make sure your app fills the need, and start trying to sell it. Then once you've built up a sales platform, then you start scaling it.

adolph 16y ago

"former Nokia executive" [number froth] "What I have been telling my readers and followers and this blog and in my books, that the real money is in true mass market services like SMS, MMS and WAP. That is where the REAL money is." This guy makes a strong case for skating to where the puck used to be.

MicahWedemeyer 16y ago
I'd say there are a lot of pucks, and he's suggesting skating towards some of the less sexy ones. The app store is shiny and new and fun for hackers, but his point about market size is pretty valid. All iphones are SMS-capable. Not all SMS-capable phones are iphones. Just like Twitter never killed blogging, smart phones still haven't killed plain old dumb phones, either.
- adolph 16y ago
  Verily, there are many pucks. It is pretty funny that the author includes WAP as one.

WilliamLP 16y ago

Some people seem to assume that building a profitable app is entirely about luck, and not about having the insight and ability to develop something better than what is in the store currently. Many of these app are developed by beginners and casual hobbyists and, frankly, just aren't very good. Thinking you can work to be in the top 10% of this crowd isn't necessarily unrealistic.

praptak 16y ago
Fair enough. How much does the last app in the 10% make?

xenophanes 16y ago

> Half of all developers will earn less than $682 per year. Do you still think this is a good business idea? I'm one of those developers. And do you know why? Because it's not my business. I wanted to make some apps. I didn't put in a huge effort. For the numbers to mean anything, you should filter out the 90% (or whatever) of apps that aren't intended to be part of a serious, profitable business.

pvg 16y ago
The numbers, assuming his inputs are reasonably accurate, still mean something - most people trying to make money selling iPhone apps don't make a great deal. It's easy to distinguish between apps that are trying to make money and apps that aren't - apps trying to make money are not free. The sort of filtering you want is next to impossible - you're asking that only the apps that are trying to make money but really mean it are to be considered. He doesn't address something that maybe you're touching on, indirectly - unlike the markets where someone makes zillions on SMS voting for a popular TV show or selling Tetris to feature phone users, the iPhone app market is very accessible to J. Random Hacker. Compared to the previous age of mobile development, it's a major improvement - same device (more or less), same screen size (more or less), same framework, no complicated permission needed from the carrier, payment taken care of, etc, etc. Plus, you never hear of anyone saying they program J2ME or BREW or Symbian apps for fun.
- xenophanes 16y ago
  > [all] apps trying to make money are not free. No, 3 of my 4 apps are paid, even though I'm not making a serious effort to make money. Why shouldn't they be? I don't mind making a little money. Just because filtering the numbers to get useful results is infeasible doesn't mean we should pretend averages across the entire store mean anything for a person who sets out to build an app store oriented business. It reminds me of all the psychological studies that use inadequate controls just because adequate ones for what they want to do would cost trillions of dollars. Then they claim to have done legitimate science. But the standards of science don't lower themselves to what data we can easily get.

krig 16y ago

This sounds very much like the way things worked when I was working in the AAA games business as well. >90 percent of all titles are lossleaders, and the few that are hits make up for the lost money developing the others. My guess is that most branches of entertainment are similar. Movies, TV, music etc. There's no such thing as a steady, guaranteed income when it comes to things like this (in my experience/opinion). That doesn't mean making apps is not a viable business. Just not for everyone who tries.

aero142 16y ago
Unless you are Pixar.

loewenskind 16y ago

I thought it was already understood that the model of "create a $1 app and sell 10k of them per month" was long over. The App store is still a relatively new market, so people will continue to learn how to be successful on it. I just got an iPad and started using the App store for the first time in my life and guess what? Out of the 5 things I wanted to use the pad for, 3 of them didn't exist at all. There is plenty of space in this market I would say. Just not for iFart anymore.

mgkimsal 16y ago
Care to share what those 3 things were you want to do but can't find apps for?
- loewenskind 16y ago
  I would, but I'm busy building them. ;)
3pt14159 16y ago
I'm also curious as to what you wanted to see. When I picked up my friend's iPad (a month or two ago) I struggled to find a good finance app that actually gave good charting and numbers for stock market options and commodity futures. I know I'm not the only one who would be interested in that AND I know that those of us who are have fairly deep pockets.
- loewenskind 16y ago
  Yea, in my experience it seems the apps are pretty focused. There are a lot of games, a lot of toys and a lot of professional made apps in specific areas (e.g. drawing/photo editing).

pchristensen 16y ago

When reading this, it helps to remember that the author is a former Nokia executive that does consulting and speaking to Big Business. He mentions Hilton Hotels, Rite Aid, and Walgreens. I don't know how you would split out Brand apps vs hobbyist vs junk apps, but he should have mentioned that. I'd be surprised if there are more than 10K Brand apps like the ones he appears to be most familiar with.

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mtholking 16y ago

I don't care for the 35k iPhone App and 3k WAP site numbers that he pulled out of thin air. From my experiences, the costs are not so disparate. iPhone vs. WAP is a poor comparison because an iPhone app and a WAP site are two different digital tactics that address completely different objectives. Brands are not buying iPhone apps to get the same utility that is available from a WAP site. They are buying them to make their brands appear technically savvy, and to increase engagement.

lecha 16y ago

For the sake of argument, let's assume the analysis is off by two orders of magnitude (i.e. assume half of businesses will earn less than $70K per year). Can anyone justify an investment in development of an iPad-only productivity software? Do you think a startup can raise capital based on such economics? My takeaway: Selling AppStore apps/ads isn't THE business model. It should be one of the channels amongst others.

1053r 16y ago

I think a lot of us are instinctively reacting negatively to this article, and I don't think it is because it's news we just don't want to hear. There is one point that the author fails to take into consideration: future growth. Anyone who has used iPad or iPhone or an Android device can tell that devices like these, not Symbian or WAP or Brew or whatever, are the future. Those other platforms might catch up, but for now they lag abysmally behind in terms of user experience. And so while they might outnumber iOS and Android for now, that numerical advantage can not last. Walk around a Y-Combinator event (or CES, or E3, or anywhere else where leading edge alpha geeks congregate) and count phones. I'd be willing to wager a lot of money you'd see a bunch of iOS and Android devices, a few blackberries, and a smattering of ancient nokia and samsung free phones held by users who "just want to make calls" (and thus aren't going to be reachable by any apps at all, WAP or Java or otherwise). So, yes, a company developing an app today for iOS or Android isn't going to make their money back on the platform as it stands in any reasonable amount of time. But a company or developer who positions themselves to be on top of a platform that is rising meteorically (and will displace literally billions of feature phones over the next decade and a half as moore's law drops silicon costs by a factor of 1000) is going to do well. Hype is about future expectations. When expectations rise above exponential growth in our industry, those expectations usually turn out wrong. But the mobile market has a current penetration of over 3 billion people and I'll wager practically every phone on the planet will be a "smartphone" in under 15 years. That's a lot of headroom for growth.

char 16y ago

My main issue with this article is that the author assumes that all developers operate equally. He averages the individuals who build apps in their spare time and might make thousands of dollars as 'extra' income, with the large app companies who spend tremendous resources on building apps that get high returns. When he crunches his numbers, he gets results that are probably very far from the actual reality of things.

ww520 16y ago
He is an ex-executive. What does he know about software development?

rfolstad 16y ago

How is this bad news? The consulting firms charging 35K per app are making a killing!

vessenes 16y ago

It's interesting that he's a big business guy. I would restate his title as: "the Apple store is for suckers or smallfry, if you're a big company." And, he's right. Big companies do take $50k+ to create mobile apps. Big companies do have much better things to do with their money; they can add far more value at greater scale. Of course, Jane developer might not be in the same boat. Another interesting confounding variable: he clearly conceives of developers as 'one-app' developers. And, he's right that this doesn't pay on the apple store. There is just, frankly, some randomness in which apps tip on the store -- most developers have figured this out already, and of course Apple gives links so that developers have an easier time cross promoting.

yewweitan 16y ago
You're absolutely right. But where's the fun in a headline like that. More to the point, I think if you read the rest of his blog, and take the perspective of some of the larger international companies, going for gold with the iPhone won't be the best business strategy. Tomi has given some case studies of how MMS has worked for car dealers in Germany, and even campaign promoters in Australia. There is this under-exploited niche called mobile marketing, which relies on WAP, SMS, MMS, etc which could give pretty high ROI for large companies (eg: BMW) Especially if you take a B2B perspective, what he says makes huge sense.
- vessenes 16y ago
  Yep, agreed completely. The Apple app store is a democratizing force.

Locke 16y ago

I'd have preferred to see a more detailed breakdown of apps. It may be a terrible market for utility apps. Or, for apps that are more feature than product. How many apps are truly products with solid business models? How do these apps do? Or, how does the picture look for games? Especially now that game developers can embrace a virtual currency / goods business model. They can get all the distribution benefits of being a free app while still making (potentially much more) money over a longer period of time. Or, do these apps not count as apps because they're too close to the web-based games that are doing so well on Facebook? If you're a developer, looking at industry-wide numbers is good, but it's better to research the apps in the niche you plan on entering.

halostatue 16y ago

I can't believe this guy because he claims that the iPhone 4 launch was a stumble. http://communities-dominate.blogs.com/brands/2010/06/smartphone-wars-update-mid-june-iphone-4-sales-stumbles-nokia-profit-warning-microsoft-os-confusion.html http://communities-dominate.blogs.com/brands/2010/06/smartph... What?

founderceo 16y ago

The analysis misses the point of why people get into mobile development. See http://bit.ly/iPhone-economics http://bit.ly/iPhone-economics

ww520 16y ago

His proposition of doing SMS app because the Idol/whatnot had made hundreds of millions is misleading. The cost of doing a SMS app might be low but the app itself is an accessory of the real product, the game show. It takes tens to hundreds millions of product and marketing cost to make and run a show like Idol over years. You think a $35,000 developed SMS app can make that kind of money by itself?

xcombinator 16y ago

I think this man doesn't get it, as a "former executive" he thinks anything in live is money. People write apps for iPhones because they dream to do what they love without working for the man. Of course it is only a remote possibility, but it is real. 99% of the people that went to California searching gold didn't find it, as in SouthAfrica, but the now deeper old mine was discovered by a solitary man looking for gold armed just with a mining pan. There is something in the human spirit that is as valuable as money that makes musicians painters, singers,movie makers or engineers that maybe won't get rich keep trying. Maybe they get to work on what they love. PS: I'm an iPhone App developer myself, since Linux Click an run app store I believed that a "right" implementation of an Appstore was going to be the future. I expected to be Apple the first to to this. In contrast with this executive they just seem to "get it". Steve Jobs is really smart in this too, when he creates something he diminish it, so the competitor's executives see an appstore and say: It's only a mere millions dollar market, not important. IBMs mainframes were the "important stuff", when real money was, mini computers were just "cheap" toys with no real application. People who wanted "job security" deciced to work with the "big boys" because it was safe... until it was not.

JVerstry 16y ago

Excellent analysis !!! Good job !!!

rmundo 16y ago

This article makes sense for you if you're the kind of company that needs 35k to create an app. In that case, sure, stay away from the app store. But for indie devs with a bright idea, the app store is a great opportunity to try something out for a very low cost. A very interesting space for startups, I'd think.

aneth 16y ago

This is an interesting analysis but a very flawed conclusion. What percentage of restaurant owners will make money? How about online entrepreneurs? Just because the expected value of building something is low doesn't mean it's a bad model. It just means you have to execute well and that most people fail.