The Economics of Building and Selling iPhone Apps

About a month back I came across this interesting blog post by Tomi T. Ahonen  which talks about what is the economics of building and selling iPhone Apps? In other words is this a profitable business?

iPhone Economics

iPhone Economics

The title of the blog certainly sounds to be quite depressing to the millions of iPhone App Developers who are are looking at the App Store in the same way as the California Gold Rush – Full Analysis of iPhone Economics – it is bad news. And then it gets worse. And it also got a review on NY Times – Is Investing in iPhone App Development ‘Fool’s Errand’?

Personally – while I am not sure what is the data source which the author has used – but my gut feeling based on various other readings is that he might be about right on his analysis.

For your convenience, I am summarizing some of my takeaway/summary from the two articles –

  • Increasing number of App Stores – Similar to iPhone App Store there are possibly about 30 new app store in process of getting launched in the mobile industry. IMO, an impending ‘nightmare’ for the content/app providers (their chances of recovering costs of app development will significantly reduce from the current state); but possibly here is where an opportunity for software service providers like GlobalLogic lie.
  • Downloads are increasing; Revenue is not! – On iPhone AppStore – even though the number of downloads have increased more than 100% year-after-year; the average revenue per app download seems to reducing every six months. (decline of about 4-5% per year)
  • Free is good!- Duh, you say! Sure, but look at it from numbers perspective. Per various studies – the average iPhone App cost is around $1.95. Average revenue per app download is around $0.24. Needless to say the traffic of download is more towards free apps. What this means is that downloads is not translating into revenues. (in Sept 2009, Yankee Group surveyed actual iPhone App users and found 18% of their apps they had were paid, 82% were free)
  • Norms around app pricing seems to be setting in – For consumer-oriented apps – the thumb-rule of best bet of pricing an app is between $0.99 – $3.83
  • Expected Revenue/device (not App) – Considering the number of iPhones sold over the last two years and based on total cumulative app revenues – each device generates almost $14 of app revenues per year or nearly $28 over the 2 year period.
  • How much does the average App Developer pocket over two years? – You might have heard of some App Developer hitting a jackpot. But how much does a typical App Developer expect? By rough guesstimates – an ‘average’ typical paid iPhone app for its 2 years of existence on store would have earned about  $1948. Apple typically keeps 30% of the revenues. So from this an average app developer would have earned about $1363 over 2 years ($682/year). (keep in mind though that there is a long tail here)
  • Average Cost of Developing an iPhone App – Two surveys have reported that most apps cost anywhere between $20-$50K to develop. (an update typically cost around $10K) (Mobile web site development costs on WAP or Web is about $3K according to Internet Retailer, on May 1, 2010)
  • When does it break even then? – Considering the above two points – the author says that it would take about 51 yrs to break-even (take this with a pinch of salt)
  • Is iPhone a big market? – Does not seems like. Worldwide there are 80 million iPhone compatible devices today in use. That seems like a big number. Except, that compared to just the installed base of smartphones at the end of 2009, it is 13%
  • iPhone vs Mobile Web Development – This is always a contentious point. Compared to iPhone App Development vs. Mobile Web App Development – development costs for iPhone are 10 times bigger, but the audience reach is 50 times worse

Happy Analyzing…

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