Depending how you measure it, the mobile platform may already be the widest path from the software developer to the ordinary person. It’s for sure the fastest-growing. So presumably there’s serious software money to be made. But how, exactly?
Back in the heady early days of the App Store’s first rush of cash, the vision seemed clear: You crank out a wicked-cool mobile app, you fly PR people around in first-class, you rake in the dough. What could be simpler? I never believed it in the slightest.
Let’s go back to basics. Here are the ways I can think of to make money that involve mobile applications:
- App sales.
- Upgrades and in-app sales.
- Ad sales.
- Server-side revenue enablement.
1. Selling Apps · This isn’t a big business, yet, but that doesn’t mean much. Wikipedia suggests that the total app revenue last year was on the order of $2B. That sounds like a big number. But if you divide it by the number of active developers, it sounds small. But if you realize that three years ago it was zero, it sounds big. But if the revenue distribution follows an inverse-square law, it sounds big for hitmakers, small in the long tail. ¶
On that last, I don’t know for sure; I haven’t done the math on Android Market, but the smart people I know living in App-Store territory think the money flows down an inverse square-slope.
y = (2×109) / (x2)
A simple inverse-square distribution of two billion dollars. Dollars are on the Y axis, developer numbers on the X. The shape of the curve is what’s interesting, not where it happens to cross any particular data threshold.
Anyhow, the take-aways are twofold: First of all, the number of people making serious money selling apps is pretty small. Second, that doesn’t matter very much, because we’re so early in the game that we don’t know how it’s going to shake out. For heaven’s sake, Forrester claims that the market will hit a $38B run rate in four years. I’ll avoid snarky comments on their methodology and stand by my claim that nobody really knows.
Having said all that, I deeply believe that the app-sales business sucks. Selling anything on a one-time basis at a price below $10 is historically the kind of business that’s been owned by companies like Walmart. I acknowledge that it’s working for some people, but it’s just not where I’d want to be.
2. Upgrades and In-app Sales · Although these are different things in the mind of your customer, they blend together in practice in terms of how you implement and sell them. The notion of charging for software upgrades is as old as software, and is perfectly sensible. You pay me some money for the use of some software I’ve written, and I go on writing more of it, so it’s reasonable to ask you for more money if you want that too. ¶ In-app sales are closely related, whether you’re selling magic wands to gamers or songs to music lovers or advice to the lovelorn. Apple has had this for a while and Android is just rolling it out.
I love this way of doing business. A basic principle of running a business is that your best potential new customer is an existing customer. Someone who’s spent money with you before and got good value is totally predisposed to open the wallet again. Any sane businessperson would rather have a continuing relationship with a customer, rather than a one-off transaction; and most people, when they’re acting as customers, would rather deal with someone they know. So this is a win-win all around.
3. Ad Sales · I work for Google, and this is obviously one of our strengths. I don’t have the strong positive vibe about ads that I get about the relationship selling, as in upgrades and in-app. Having said that, I know for a fact from talking to developers that ads are starting to work pretty well for some of them. And I suspect that the ratio between the amount of work you have to put in and the amount of money that comes out is pretty attractive for ads, as opposed to cooking up new things to sell to users. ¶
I have a hunch that this will play out even more strongly in the world of tablets, where there’s more room on the screen to integrate ads gracefully without getting intrusive.
4. Server-side revenue enablement · As an old Web guy, I’ve always thought that on the Internet, the real money comes from stuff you do on the server, not stuff you do on the client. My time in the Android world hasn’t changed my mind all that much. ¶
For example, one of the most-used apps on all my Android devices is TripIt. It’s a travel organizer; a big time-saver in getting yourself organized, and a total lifesaver on your handset when you’re walking through a strange airport trying to fish out your hotel’s address for the customs form or the taxi driver.
The app is free, but its slickness helped convinced me to sign up to TripIt’s for-pay service. The other free app that sends my money to its provider is Kindle (and we’re talking serious money, I just spent $8 for a book that went across my radar while I was writing this piece).
Server-side revenues at least have the benefit that the business models have been here for a while and we’ve got some expertise in how to build and grow them.
What We Don’t Know Yet · Nobody has any idea how big the mobile-software business is going to get. I’m pretty sure that the current $2B/year run rate is going to look small in the rear-view at some point, but when? And how’s the cash flow going to be dealt out among initial sales, follow-on sales, ads, and services? I think my biases are pretty obvious if you’ve read this far, but in fact nobody knows. ¶
One thing we really don’t know, and the question I’ll take up last, is whether this space will enable new kinds of businesses.
Lifestyle? · If you haven’t already, I recommend you read Anil Dash’s Mom and Pop, at Web Scale. This one resonated deeply with me; both times I helped launch a company, it was a classic VC-fueled swing-for-the-fences play; an approach which I now believe to be more or less completely insane. If I do it again, it’ll be lifestyle+Web all the way. ¶
If you look at the mobile-apps business, well, it’s just not all that big. Even the kind of money that Rovio’s pulled in with Angry Birds does not point at the kind of exit that makes a venture investor’s heart go pitter-pat. But I bet the management over at Rovio is pretty happy nonetheless.
My hope is that mobile software is a field in which a thousand lifestyle-business flowers can bloom; that it becomes a place where you can actually make a decent living in the long tail. I’m pretty sure that if this happens, that lifestyle money isn’t going to be wholly or even mostly from app sales. This table needs all four legs to hold it up.
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