Wednesday, May 27, 2009

The Incredible App Store Hype

iphonehype.jpg

The hype surrounding the iPhone App Store continues to persist. It's been called a gold rush, and stories of one man teams making hundreds of thousands of dollars almost overnight abound. But what does that mean for you, if you want to get into the game? Let's look at the reality.

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First, so you know where I stand among the 60,000 or 600,000 (I've heard both numbers) registered iPhone developers: I have nearly 20 apps in the app store as of this writing. Three of those apps are on the charts:

With two apps on the paid charts, one would assume I'm rolling in dough. After all, this is a gold rush, right?

The reality is much more startling. In order to place #34 on the social networking charts, you need 30-35 downloads a day. At the standard app store pricing of .99, and after Apple takes its cut, that means your app needs to bring in a little over $20 a day to chart at that position. And social networking is a popular category.

Perhaps you'd expect the game charts to do better. Board games isn't a wildly popular category, but it still might surprise you that it takes about 6-8 downloads a day to chart. That means if you are making around $4 a day you'll be in the top 100.

So what does this all mean? Well keep in mind there are over 36,000 apps in the app store. If the apps on the category charts are doing those sorts of numbers, what do you think the rest of them are doing?

Nothing. Absolutely nothing. The aren't selling at all.

Now here's the problem I have with all this. Any normal business that doesn't involve software or the Internet is measured by its average performance. For example, if you want to open a coffee house in your town, part of your research would be looking at how other coffee houses have fared locally, and maybe looking at other, similar areas and seeing how coffee houses have fared there. You would determine an average performance measure and use that determine if it is worth the cost and time required to open your own coffee house.

As software entrepreneurs, we fail to do this time and time again. We measure the market by its huge successes. This would be the equivalent of opening a coffee house after looking at Starbucks' quarterly report, and assuming that Joe's Coffee and Cake is going to quickly rise to the level of a multinational corporation. Rational small business people, unless they have the resources to begin with, don't try to compete with huge, entrenched corporations. Nor do they assume that their success will be on the same level. Joe will look at Sue to get an idea about what his business might do.

After years of playing the web game, I still can't believe people think like this. How many start ups think about revenue after they've brought in the traffic? The huge successes of the Internet always seem to be the ones bleeding huge sums of money. Imagine if the real world worked like this -- what would you rather invest in, Joe's Coffee House, which profits a couple thousand a month, or MegaCoffee 5000, which is multinational but loses a couple million a day?

But getting back to the app store: I post these numbers so people can understand what is really involved here. The app store isn't a sane marketplace at all, any more than the lottery is. When you submit an app, you are buying a ticket. Maybe you will be one of the few who makes a couple hundred grand in a hurry, but most likely you will be just another shlub tossing your blood, sweat and tears into the void where it will be ignored.

And at least on the web, when we got charged up over how rich our shiny new web app was going to make us, we were using massive, hundreds of millions of dollars sales as our ridiculous reference. On the iPhone, the biggest successes are in the 500,000-600,000 range. Anyone want to try to calculate the expected value of that lottery ticket?

--

Like this? If you have an iPhone, buy one of my apps. God knows I need all the help I can get.

26 comments:

Jeffrey McArthur said...

What do you think your sales would have been if you used a more rational pricing, for example instead of $.99 you charged $9.99?

I have been following a lot of discussions about the upward price preasure on mobile applications.

If you only sold half the number but at ten times the price it starts to make better economic sense.

Anwis said...

Depends on the elasticity of the app; I'm guessing most apps (being not necessities, but luxuries) are going to be fairly elastic and so by raising the price that much, I think he's going to lose any of the buyers that he would have gotten in the first place.

As for the main thesis of the article, it doesn't make a whole lot of sense to me since I'm not sure why you would want to look at the average expected value gained in all industries. In the case of the software industry, for instance, and in particular web apps, the degree of freedom is so great and the ability to be *much* better than your average competitor is so easy that it makes sense to look at the top 5-6% and aim for that. Ignore the tail since it's mostly junk that people probably didn't spend too much time or money on.

Jeffrey McArthur said...

The Apple iPhone store gets all the attention in the press, but Handango has been around for over ten years. Handango sells applications for Windows Mobile phones. The average price for a game for a Windows Mobile phone on Handango is between $15 and $20.

I did a lot of research on this. That is the basis of my business plan I created. I am trying to raise capital to get my company going. After doing the research and cruching the numbers, it does not make sense to create a product for a mobile phone and sell it for only $.99 unless you can generate huge sales. But that is not the way to plan a business. You need to plan for sustainable growth.

Just cruch the numbers. If you sell two at $15.00 you make as much money as selling thirty at $1. But the odds of selling three at $15 is much higher than the odds of selling forty-five at $1.

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