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.

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

  1. From my experience, it is extremely difficult to generate a decent amount of revenue on the App Store:

    – Apps are undervalued. The average app price on the AppStore is $3.64. Price your app just a couple of dollars higher than that and your sales plummet, no matter how valuable the app is! That’s because the App Store is full of free and $.99 apps that have already set the price expectations.

    On the price level, serious productivity apps have to compete with cheaply priced app that tend to be either simple apps developed in one afternoon by teenagers, such as apps that make fart noises, or good apps developed by companies (Apple, CNN, etc.) that make their revenue from other sources.

    There might be a few good apps that generate decent revenue, but those tend to be rare apps that target everybody and become instant hits, such as Angry Birds.

    – The cost of advertising a cheaply-priced app is usually higher than the revenue the ad campaign generates.

    – Relative to the desktop market, the portable device market is still small and more difficult to target.

    – App developers incur many expenses. The development cost includes spending considerable time writing and updating code for different devices and OS releases, buying several devices for testing, developer license fees, etc.

    – Apple takes 30% cut from every App Store transaction.

    – The revenue generated from displaying banner ads inside the app is negligible.

  2. Truth be told, big companies don’t like to be dependent on another big company for their lifeline. If you get in an argument over some policy and lose favor or even get banned, you can put the entire company at risk. Yes, if you do a bang up, smashing job in creating a few hit products you can create a hundred-million dollar biz just through the App store, but most companies with that type of financial muscle don’t like to be so reliant on the goodwill of others. Look at Zynga having intense negotiations and signing special deals with Facebook to get favorable ad treatment, rates on buying credits, etc before announcing any sort of platform exclusivity. Right now a lot of smallish companies are hitching their wagons to some of the biggest platforms in town (iOS & Facebook are the most notable) and the rush to promote themselves on Facebook in particular is pretty intense with dozens of companies listed at doing social media promotion but I think that a lot of companies would rather not be locked into one platform. Its just that the advantages to being on there outweigh disadvantages. Most big companies want to create their own platform and get others to depend on them and create their own lockin effect. I think there’s a place for lots of smaller creative studios to work on iOS and Facebook and these other platforms and create some liberating products through this relationship: but its a lot harder for bigger companies to absolutely depend on this. As a user (not a shareholder) I’m glad though that a lot of bigger companies are embracing some of these platforms and building on top of what people already use.

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