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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  • Emailandthingsemailandthings

    I can't agree more. I developed two apps for Apple and all I made was $25.00. Mind you I do understand that only top apps take all the earnings and reasonably so. Don't despair developers, here are 10 things that make more money than developing apps

    1.- Pick pennies at the nearest food store
    2.- Sale flowers or water on the street
    3.- Flush your toilet when necessary
    4.- Beg for money for a day
    5.- Skip dinner
    6.- Skip a holiday season
    7.- Sale your phone
    8.- Combine #2 and #3
    9.- Live below your means^2
    10.- Ask for a refund

  • Matt Fryy

    Theres a slim element of truth to this.
    For example it's a fact that many users pay good money for applications that they never or rarely use, but that's not exclusive to the app store.

    The entire economy depends on people buying shiny crap, whether they end up using it or not.
    If consumers stop consuming, the market collapses.

  • SpiderSimian

    The idea that an "average" iPhone or android app costs $35,000 to develop is completely ridiculous. Neatly all of the apps in the app store are either copies of each other or extremely simple programs that could be written in a number of days, or even hours, by a single skilled developer.

    Sure, *some* apps may cost $35,000... I would imagine many of the higher quality games cost more than this - but the majority probably cost less than a grand or two in man time to churn out.

  • rattyuk

    "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."

    I think this may be your biggest gripe. Looking at your bio:

    "Aaron Shapiro is Partner at HUGE, the full-service digital agency within Interpublic Group. HUGE, named one of ten agencies to watch in 2010 by Advertising Age, focuses on helping companies build digitally-driven businesses. At HUGE, he drives digital strategy for some of the firm’s largest clients, including JetBlue, NBC Universal, Pepsi, Target and TimeWarner"

    Did you bet on advertising and ignore the "App bubble"? Are you trying to refocus the world to your point of view? I think you are taking your own point of view "Apps, for me, are pointless" and cannot think outside the box to see how others are using their machines. You are projecting your opinion onto the the users of the iPhone in general. These two things probably don't add up to what you are presenting here.

  • Mike Schwab

    The main reason I never used more apps is because my 3G wasn't really fast enough to make them useful. Now that the new iPhone is fast, apps will slowly gain traction. If you have paid close attention to Apple's product evolution over the last 10 years, you'll remember that most new features, no matter how cool, no matter how useful or easy to use, still take years to catch on. Users are extremely gun-shy because of the years of abuse and malware they suffered at the hands of Microsoft.

    The stats here are not very thoughtful - mean and median don't tell this particular story with much conviction. Also, who told you that it costs $35,000 to write an app? Mine cost me $99 and a month. It's called TalkToHer.

  • Keith Posehn

    I disagree on almost every point here. You can make plenty of money, deliver lots of value and do so intelligently with mobile apps. Web apps are not the future of mobile consumption - they are a dead end as I point out here in my response:

  • David Mullings

    The article is way off in the way it attempts to provide proof for the thesis in the title and the comments have done a good job of point out the flaws.

    I seek to add to the discussion by point out that "Angry Birds" has SOLD 7 million copies at US$0.99 each with 70% of that going to the developers.

    Apps generate profit and it doesn't hurt that the developers put out a FREE version of the App which worked as a brilliant marketing tool.

    Also, apps can be developed for way less than $35,000

  • StatsGrad

    Summary of my post: there's a good chance and good data to suggest that you're not going to make your yearly salary off of iphone apps.

    I don't trust your numbers at all. But I assume that the distribution of App revenues is an exponential distribution.

    20% earn a lot, 80% earn squat.

    So we'll take your expected value at heart, your mean, your average: 4444
    so 1/4444 = 0.000225 = lambda for the exponential distribution. This is not right because there's a lot of free apps and the zero gets borked.

    So the median of from this distribution is ln2 / lambda = $3080. So half of all apps earn 3080 or less. Sounds somewhat profitable really, but this ignores a long tail of zeros.

    So the first quartile? 0 to 25% of most paid apps? $1278 the first 25% earn 1100 more than the dev license. Pretty good I guess. That's about 1/2 a week of coding.

    3rd quartile, that is the 75% of the most paid apps? $6100 so that's about 3 weeks of pay.

    So how do I earn 40k a year from a single app? I have to be in at the top of the 99.99% percentile.

    Don't believe me?

    -1*ln(1 - 3/4)/lambda = 6160
    -1*ln(1 - 1/2)/lambda = 3080
    -1*ln(1 - 1/4)/lambda = 1278
    -1*ln(1 - 9/10)/lambda = 10232
    -1*ln(1 - 99/100)/lambda = 20465
    -1*ln(1 - 999/1000)/lambda = 30698
    -1*ln(1 - 9999/10000)/lambda = 40930
    -1*ln(1 - 99999/100000)/lambda= 51163
    -1*ln(1 - 999999/1000000)/lambda= 61396

    Oh and 61396 * 70% = 40930 So do you see that? For 40k a year from an app you need to be at the top of the heap: 999,999/1,000,000

    Literally 1 in a million.

    To demonstrate that these numbers are off:
    z=225000 (the number of apps)
    -1*ln(1-(z-1)/z)/y = 54767

    So we're out some constants but whatever. The point is that the nature of the distribution of wealth in App store is very exponential. And why is that? Well for one Apple enforces it with the top 10 list of apps. Frequent apps are frequently bought while the ones not promoted are not visible and not purchased.

    But even if Apple didn't do this the distribution would likely have these properties because these kinds of distributions exponential and power law distributions are very common in usage behaviour, purchase behaviour and event behaviour.

  • Scott Klein

    The revenue doesn't scale linearly -- some apps make a ton of money and a whole lot make very little -- so you can't extract anything meaningful from the total size of the market divided by the number of players. The costs guesstimate is similarly useless, as has been said elsewhere in these comments.

    Surely any app developer would have happily taken your call and gone on the record about the way the economics work and don't work for them.

  • Mike Burek

    A free app does not earn income, therefore, it should not be included in the average revenue calculation. Please re-do this.

    A say "typical iPhone app" costs $35k to develop and you assume the median yearly revenue is falls on the "typical iPhone app." You cannot compare the "typical" with the median - they are very different ideas. There is not enough info about the distribution of revenue to make any judgement.

    There are many apps that take less than an hour to develop, or are just someone's test app as they are learning how to write high quality apps. The comparison falls apart when you realize you are trying to say that the flashlight apps there are in the same development investment as Angry Birds, a good twitter client, or a GPS app with built-in maps that costs $99.

    You bullet "Apple brags more about the value of their app mass, than the value of the apps themselves" is standard marketing for anything. A restaurant does not show every single food item in their tv ad. Bank of America lists just a few hotspot ATM when it says there are xxx number of ATMs. Cable and Satelite TV only highlight the most talked about shows in their ads. The cover of FastCompany Magazine only lists a few headlines, not everything inside.

    You ask, "Can you think of a faster way to get information," than typing a name into the search on the iPhone and you compare it to going to a website. Do you have a bookmark for each website you visit?

    You say if you want a new app, you have to search for it, also. What happens on the web when you want information and you do not have a bookmarked website? Oh, you type in either the name of the website, or you type a request into a search engine. There is no difference. You are both for and against having an icon for an app. It seems you think all the icons are gluttony, yet you don't want to type anything in to get to an app. No one is forcing you to fill up all the icon spots.

    Of the 5 apps you use: The New York Times, Dropbox, Pandora, MenuPages, and Skype:
    Skype is an app - on every platform.
    Pandora would be a webpage if phones could support it, but they don't.
    The NYT can format better with an app. A website cannot cache for offline reading.
    Dropbox can be used with just the web, but integrates better with an app on every platform.
    MenuPages app provides better formatting on a small screen than the webpages can.

    Apps can utilize built-in features of the phone and it's interface that a webpage simply can't. Because of the spotty nature of the internet connection, apps work better because they have the interface already stored on the phone and can cache data for offline access.

  • J. Jeffryes

    Stefano and Brad are right, this article is useless.

    The app market has very low barriers to entry, that always results in a few high-quality or lucky apps making a lot of money and most making little or none. An analysis of the top money-making apps shows that quality is what makes the difference, so any team that can build high-quality apps has a very good chance of making money.

    For low-quality or poorly thought out apps, it's a craps shoot.

    The one place I agree is that mobile sites have been poorly designed and unusable, which has led to mobile apps. But that's a trend that's ending. More and more mobile sites are being redone correctly, and many are as good or better than apps.

  • Chris Reich

    Great piece. I think the bubble extends into the affection for the I-Phone in general. Sooner than later, people will get app fatigue and return to using the phones as...phones. Texting will remain popular as will exchanging images.

    I see a lot of rudeness (texting during meetings, classes and conferences) and silliness (honey, which sweater should I buy?) with I-Phones. In fact, I'd go as far to call them productivity killers.

    I see some blow-back in Facebook: who likes the nonsense of Farmville? The I-Phone app is a younger version of the 9mb PowerPoint file of cute animals retired people love to distribute. But have you noticed that even retired uncle Harry eventually got tired of Maxine jokes?

    Chris Reich

  • Sean O'Rourke

    "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 way these simplistic averages are juxtaposed... are you saying $7,875,000,000 has been spent on iPhone app development? If not, we need more apples-to-apples numbers to start making comparisons.

  • ClickBrain

    This would be far more interesting if these numbers were correlated to software markets in general. There are thousands of applications developed every year for windows, Macs, web servers, etc. etc. and most of them fail to provide a profitable return. It's called business and marketing and UI design and good coding, and customer service, etc. etc. etc. Correlate it to any other VC investment and gambling on returns and the upside is worth it if you make enough bets. Sorry, but the conclusions drawn from the stats are rather silly when compared against starting any technology business.

  • Stefano Augello

    While I do believe that apps are over-hyped and not a silver bullet, I think that most of the points raised in this article are superficial:

    - Apps don't generate profit for developers: apps generate profits for developers that make apps that people want. Most fail, some survive, a few get rich. It's called "market economy", and it applies to most industries.

    - Apps aren't very profitable for Apple either: this is a funny point. 1% of Apple's total gross profits is loads of money. Especially considering the very low cost of mantaining the App Store. If they didn't care about that 1%, I'd be happy to receive on their behalf.

    - iPhone users don't find their apps very valuable. This stems from a misunderstanding: while an app that I never use is worthless, an app that I use once a year can be incredibly valuable. Think at Repairpal if my car tire goes flat. Or at a travelguide, that I will use only for a few days, but that can replace an expensive and bulky hardcopy.

    - Marketers are spending money on apps rather than mobile web: apps were born because people weren't accessing the previously available mobile websites. As a rule of thumb, until we figure out a way to make mobile sites really accessible, we're right to prioritize apps. Once we do, we'll do both, depending on the objective.

    - Venture capital is flooding into the app economy despite of ROI: that's the venture capital model. Invest in an industry with average or undetermined returns, hoping to bet on the few, successful companies. If the average industry ROI was high, it'd be a market for stock rather than VC.

    - So many apps, so little time: that's a problem, the same one we had when the web went mainstream. That resulted in Yahoo, and then Google. Let's see who cashes in on the equivalent for apps.