Can you build a Big Business on Apple’s App Store?

A good friend refers to the Apple App Store as the California Lottery. So I thought I’d do some rough numbers on how feasible it is to build a big software business creating apps for iPad and iPhone and selling them in Apple’s App Store.

The Apple App Store will still own three quarters of mobile app revenue by the end of 2011. It’s the place to be if you want to develop paid mobile applications.

According to Apple, they had paid out developers $2.5 billion since the creation of the app store until July this year. I’m including this as a sanity check on my numbers below.

According to this article, the combined revenue of all app stores will be $3.8B in 2011, with Apple owning 75% market share. That’s $2.85B total revenue for the app store in 2011 with 30% going to developers so total payout to devs will be approximately $1.995B for 2011 (which roughly gels with the total all time payout number above).

The app store just passed 500,000 approved apps in May 2011. (Edit: fixed a typo. Apps, not developers)

In May of this year:

  • $3.64 was the average price for paid apps.
  • There were 244,720 paid apps.
  • There were 85,569 unique developers.
If those paid apps split Apple’s projected 2011 revenue to developers of $1.995B between them, they each earn $8152.17 per year. There will be more paid apps by the end of 2011 than there were in May, so the same calculation for 2010 revenue to developers gives us: $2.1 total sector revenue X 75% apple’s market share X 70% developer share gives us $1.1025B / 244,720 paid apps = $4505 per app in 2010.
I’ve calculated both 2010 and 2011 revenue per app because the only data I have on total paid apps is from May.
So total revenue per app now is roughly between $4K and $8K per year based on my back of the envelope calculations.
While app store revenue is increasing, so is the number of developers in the app store, exponentially:
Lets say you create a startup producing Apple App Store apps. You manage to completely dominate the app store in 2011 and capture 1% of the total 2011 app store revenue of around $2 billion that Apple will pay out to developers.  That’s $20 million in annual revenue. Remember, you’ve just owned 85,560 other unique developers and a quarter million other paid apps, which is not impossible.
To put this in perspective, here is the 2010 annual revenue from a collection of well known software companies, leaving out the eye watering revenue from companies like Oracle, Microsoft, Apple, Google and the like.

Food for thought.

Are you building an R&D lab or a business

Take Twitter in a parallel universe. The team builds a great useful and viral product. They start growing like crazy and hit their first million members. The growth machine keeps pumping and everyone is watching the hot Alexa and Compete graphs cranking away.

They start getting their first acquisition offers. But the smart folks know the second differential of their graphs is still wildly positive (it’s curving up). They decide to hold off on a sale because they figure that even though they have to raise another round to buy infrastructure, their equity will still be worth more net net.

They keep growing and that second differential gets a little smaller as the curve starts flattening out into a line. Then right before the line turns into the other half of an S they hire Allen and Company, line up all the acquirors and sell for $3Bn to Google.

What just happened is a kick ass group of product guys teamed up with a kick ass group of financiers to create an R&D lab. The lab came up with a hit product and was acquired. Make no mistake, this is a very very good thing! In this parallel universe the amazing product that is Twitter is combined with a company with the business infrastructure and knowledge to turn it into a money printing machine. That creates jobs, brings foreign currency back into the US through exported services and of course the wealth creation event for the founders has a trickle-down effect if you’re a fan of supply side economics.

Now lets step back into our Universe (capital U because I don’t really believe in this parallel universe stuff). Another group of kick-ass product guys called Larry and Sergei teamed up with a group of kick-ass financiers called Sequoia in 1999. A guy called Eric Schmidt who is a battle hardened CEO from a profit making company that got their ass handed to them by Microsoft joins the party.

In 2000 Google launched AdWords and the rest is business model history. A history that you will never hear because once the company started printing money they went dark. There are tales of Bill Gross having invented AdWords, legal action, a possible out of court settlement – but no one will ever know the full details of these early days and we have almost zero visibility into the later story of how Google turned that product into a money printing business.

The stories of successful transitions from product to business are never told. Even if they were they would bore most of us  because they are not fun garage-to-zillionare stories. They are stories where the star actors are cash-flow plans, old guys with experience and teams of suit-wearing sales people.

The thing that attracts most geeks (also called Product Guys) to startups is the garage to zillionare story through an exit. And that’s OK provided you get your head screwed on straight and understand that you are an R&D lab who’s goal is to get acquired. So go and make yourself a credible threat. Make yourself strategically interesting. Go and build the kinds of relationships that demonstrate your worth to potential acquirors, get them addicted to your data and result in an exit.

[Quick aside: I spent the day skiing a while back with a great guy who heads up a certain lab at Stanford. They came up with an amazing product that you now use every day. They teamed up with an A list VC with the specific intent of selling to Google. That’s exactly what they did and it has improved our lives and Google’s business model. So again, the R&D lab approach is very very OK.]

The other smaller group of founders are business geeks. I’m friends with a handful of company founders and CEO’s in Seattle who absolutely personify this group. Everyone of them was a VP in a larger company. They all have MBA’s from top schools. And every one of them is focused on generating cash in their business. The road they’ve chosen is a longer, harder road with a lower chance of success but a much higher reward (think Michael Dell, Bill Gates, Larry Ellison) if they succeed.

Both paths are morally and strategically OK. You just need to know which you’re on and make sure your investors and the rest of the team are using the same playbook.

temet nosce (“thine own self thou must know”)

Why we breathe

Free Diver in LimasolHold your breath for a moment.

In about 10 to 30 seconds you’ll be feeling a strong desire to take a breath. That’s not caused by lack of oxygen. It’s caused by excess carbon dioxide buildup in your blood.

[Ok you can breathe again.]

The trigger in mammals that causes us to want to take a breath is an excess buildup of CO2. In reptiles the trigger is lack of O2. Free divers don’t hyperventilate to get more O2 into their bloodstream. They do it to to flush out excess CO2 and remove that breathing trigger. That’s also what causes shallow water black-out as you’re surfacing, so don’t try it without a buddy.

I’ve worked in more startups than I care to count where the lack of endurance was not caused by lack of oxygen, but an excess buildup of waste. Getting a larger office, buying excess server capacity early on that isn’t needed, hiring excess people to manage that server capacity, hiring managers to manage the people, hiring an ad agency and PR firm and a small team to manage them.

Once you start down the path of waste you may still have enough oxygen in your bloodstream to surface, but the excess CO2 in your business creates a strong demand for more Oxygen which causes you to raise another round of funding, producing more CO2 and the cycle continues.

So start your business by hyperventilating to flush out all excess CO2, take a deep breath and beware of shallow water blackout as you’re approaching the surface.

[Photo credit: My good friend Bruno Stichini who hosted a free diving world record attempt in Limasol, Cyprus back in 2000]