The Great App Bubble

Eight signs we're in an App Bubble.

iphone4When I recently received my new iPhone 4, I took great delight in organizing my apps into folders, finding new apps in the app store, and seeing how beautiful various apps looked on the new screen. Then I used it for a couple of days and realized, not counting pre-loaded Apple software, I use exactly five apps: The New York Times, Dropbox, Pandora, MenuPages, and Skype. Why am I wasting time collecting and organizing all these apps? We're in an app bubble.

My app library—littered with exactly 87 apps I used once and never touched again—now reminds me of a graveyard of defunct company logos from the dot com boom. Like the go-go days of 1999 when everyone had to have a Web site, today everyone wants an app. iPhone, iPad, Android apps for all, plus Blackberry for the very ambitious.

Here are eight signs we're in an app bubble:

  • Apps don't generate profit for developers. Apple CEO Steve Jobs has said, the App Store has generated more than $1 billion in revenue for developers. That sounds like a big number. But in this context it's not. One billion dollars in revenue for the approximately 225,000 apps is $4,444 per app—significantly less than an app costs to develop. In a well thought-out analysis of the economics of iPhone apps, authors Tomi T. Ahonen and Alan Moore paint a bleak picture. A typical iPhone app costs $35,000 to develop. The median paid app earns $682 per year after Apple takes its cut. With these calculations for the typical paid app, it takes 51 years to break even. It's not any better for free apps. A free app also costs about $35,000 to develop. But there are so many free iPhone apps that at a rate of 2 second per app, it would take approximately 34 hours for someone to check out each one. That's not great odds for a revenue model based on advertising.
  • Apps aren't very profitable for Apple either. According to Apple Insider, "Apple has long maintained that the App Store isn't meant to be a profit generator, as much as a means of attracting customers to the iPhone and iPod touch." The App Store's gross profits amount to just 1 percent of Apple's total gross profits.
  • iPhone users don't find their apps very valuable. In 2009, analytics start-up Pinch Media reported that people barely use the majority of apps they download. Only 20 percent of consumers utilize a free app the day after they download it. By 30 days out, less than 5 percent of consumers are still using it. Paid apps (page 13 of the company's fascinating 33-page slideshow) have a slightly better performance record, but they still get hit with a steep drop in usage within a period of 11 days. The value of most apps may be in satisfying the curiosity of what the app can do, not in its usefulness or relevance in a user's daily life.
  • Apple brags more about the value of their app mass, than the value of the apps themselves. This is the case both on the App Store page, iPad advertising and in a recent keynote speech where Steve Jobs said people have downloaded 5 billion apps in the last two years. Meanwhile only a handful of apps have been featured for their usefulness.
  • Ditto for Android advertising. I feel like I'm back in the days when Alta Vista bragged about spidering more Web pages than Lycos.
  • Marketers are spending money on iDevice apps at the expense of improving their mobile Web sites that everyone with a smart phone can access. According to Ahonen and Moore, iDevice app development actually costs 10 times more and reach is 50 times worse. Sex appeal will only trump pragmatic reach for so long.
  • Venture capital is flooding into the app economy in spite of the questionable ROI proposition. Prior to the iPad launch, venture capital firm Kleiner Perkins Caufield & Byers doubled the size of its "iFund investment pool" to $200 million, Reuters reported. Recently CNET, an E! Online co-founder, and a couple of other partners teamed up to form AppFund, a company that provides funding and direction for app developers. And there are plenty more Internet funds spending much of their bankroll on app startups.
  • There are so many apps, finding the one you want takes time and effort— time and effort that could be spent getting the information in a faster way. The iPhone 4 can display 2,149 apps. That's 2,144 more than I need;1,969 more than could be displayed via iOS3; and 2,001 more apps than could be displayed by earlier versions of the operating system. Graph out this increase in app display capacity and it looks like an obelisk. But still 2,149 is only 0.96 percent of the 225,000 available iDevice apps. Steve Jobs has said 15,000 apps are submitted to the App Store each week. With this many apps to sort through, finding new, useful ones to download can be a painstaking task. Then on my phone, if I want to find an app I don't regularly use or a new one, I need to use the search function to find it. Can you think of a faster way to get information? The browser. Once mobile Internet gets faster, apps as the key to on-the-go information and tools will be on the outs.

Does this mean companies should stop making apps? Unfortunately, no. Until the bubble bursts, apps are the only mobile game in town. And without a doubt the future of digital is the ubiquitous, pocket-sized screen. What's needed are apps tied to real business models that have real ROI. And,companies should build apps with their eyes open about what they should realistically expect to accomplish with what they develop. Having an app for an app's sake is not enough.

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