The fact that Facebook spent $1B for mobile phone photo share company Instagram less than a week after it raised money at half that valuation shows the growing importance of mobile apps in today's economy (and the limitations of FB's net-centric model). Since most are free or 99 cents, how will the economics ultimately work out for the people that develop them? Is app development a viabile business or are we heading down the same path as the first e-commerce bust (remember Pets.com)?
For one, host companies like Apple don't care and aren't even focused on the standalone business. When you dive into the numbers in an interesting article on the iOS economy, Apple made an astounding $300M last quarter (and growing) from its 30% cut of app downloads. Despite it being a meaningful number, the hardware sales driven by the App Store is what's most critical to them. Google doesn't care about making money on apps as its mobile search revenue is expected to more than double to $5.8B in 2012. In the long-term, these companies should care. If you charge a 20% interest rate to loan money and noone can pay you back, how long will the party last ?
How does this translate to the typical developer? The average selling price for an iOS paid app is about $1.55. But once you take into consideration the ratio of free to paid downloads (~4.5x) and Apple's cut, it nets the average developer close to about 23 cents per app per user. I'm not sure what business model can survive on a quarter a sale, but certainly there has to be more behind it for the channel to thrive.
If you are a developer for corporations, it doesn't matter. Schwab and Fidelity are using apps for customer retention and account access. Pepsi uses it to build brand loyalty. As with most marketing budgets, traditional media dollars are moving to more relevant channels with mobile apps being one of the fastest growing. I would surmise that a corporate app developer is one of the hottest jobs around right now.
But what about the guys trying to make a living or a business? Jeff Bezos built a website and they came; can that happen in the mobile app world? Certainly Instagram was a monetary success, but only because they sold the promise (eyeballs versus cash flow). The other folks that are collecting a 23 cent toll for their niche app won't stay forever. Ultimately, the crowd of creativity will dissipate unless they can find a way to make it worth their while.
You can see similarities in the blogosphere. There used to be millions of people writing their thoughts in hopes to monetize it in some shape or form (present company excluded of course). Many have turned off the lights and went back to diaries. Only a few blog sites have really generated a significant following. And even with sites like Huffington Post or Seeking Alpha, I doubt they are tremendously profitable. There are probably a few niche businesses in the blogsphere, but there is no Google.
So will Apps just become a cost center as many creative things do? Areas such as gaming and micro-transaction based models are gaining steam. I imagine affiliate programs from FB and other mobile commerce efforts will continue to add big dollars to the pie just as it did on the web. Perhaps it is too early in the cycle for a large scale disruptive business model to have emerged. As much as I want the guy who created the tongue salivating Ilickit make a living, I might be better off with a couple of shares of Apple.
