Mobile App Mania

Other phones required developers to distribute their mobile software over the Web; customers had to find a site selling an app, fish for their credit card, and sometimes even dock their phone to their PC in order to install it. Apple did away with all those hassles. Every iPhone app would be sold through a store that sat right on the phone. Customers loved this model, and it was also a dream for developers, who now had access to a vast new market. But the plan worked out best for Apple. The company approves every app that enters the store, and it keeps 30 cents on every dollar customers spend. Déjà vu all over again: Just as Jobs has done in the music business, he's given customers and producers everything they wanted -- yet he has somehow managed to keep all the power for Apple.

Customers don't seem to mind. They're downloading apps at an amazing rate (800 million in the store's first eight months). What they're attracted to is a whole new style of software. The apps to be found on mobile phones are more personal than any you can build on a PC -- after all, they're portable, available to you wherever you travel -- but paradoxically, they're also more social, connecting you to other people and to the world around you. Ocarina's killer feature, for instance, allows you to listen in real time to other people who are playing with the app. The music flows over the Internet, from their lips to your ears -- "a brain-frying experience," as David Pogue declared in The New York Times. Or consider ShopSavvy, one of the most popular Android apps. Go to your favorite brick-and-mortar store, pick something off the shelf, and snap a photo of its bar code. Within seconds, ShopSavvy looks up the best prices for that item both online and offline. This could remake entire industries. You'll never pay full price again.

Developers, meanwhile, are drawn to the app market's many heartwarming success stories. As the Dow plummeted last winter, the tech press went gaga over Ethan Nicholas, a programmer at Sun Microsystems, whose family had contemplated selling their house in order to pay a raft of unexpected medical bills. Nicholas's Hail Mary pass was to build iShoot, an iPhone tank game. For weeks, he woke up early and stayed up late, cradling his baby boy in one hand while coding the game with the other. The game, which Nicholas sells for $2.99, proved an addictive hit, and he has estimated that he'll be a millionaire before the year is out.

Nicholas's story illustrates a central truth about the App Store: It is radically egalitarian, with programs from big companies sitting next to those from one-man shops, all of them with an equal shot. But that's also the store's consuming problem. The iPhone's screen measures just 3.5 inches diagonally; as a retail experience, it's more cramped than a Black Friday sale at Wal-Mart. Of the tens of thousands of apps on sale, most are never seen by the customer. The apps that do best are those that catch a few early downloads and make it into one of the store's best-seller lists, which are determined by download volume over a short period of time (the exact algorithm is a secret). "If you get to the top 100 list, you see your sales go up by an average of 250%," says Greg Yardley, the cofounder of a company called Pinch Media, which makes a tracking script that developers can add to their apps in order to measure success. "When you get on the top 10, it's an order of magnitude more downloads."

So the App Store is a hit machine. The economics are not unlike those of the movie business or the online viral-video market: lopsided and impossible to predict. A few lucky apps burn up the charts for a couple of weeks, selling tens or hundreds of thousands of copies, and then fade away. The vast majority, meanwhile, see a tiny number of sales.

Customers are not only prone to fads, but they're cheap. A few companies have had success selling apps at $10 or more. EA Mobile sold versions of its best-selling SimCity and Spore games for $9.99 each, and both titles made it to the No. 1 slot in the store. Kai Yu, the founder of Beejive, a company that makes an instant-messaging client for iPhones, sells his app for $15.99 -- among the higher-priced ones in the store. "We're a software company," Yu says. "We think we're offering a good value, and we still have very good reviews." But even developers of the best-reviewed products say they feel pressure to lower prices. As Yardley notes, when an app's price falls to 99 cents, the lowest nonfree price allowed in the App Store, downloads can double. This is due, in part, to the fickleness of iPhone customers. A lot of people buy apps knowing they won't use them very often, Yardley has found. On average, people will use one about 10 to 12 times, and then never again. If people consider apps disposable, why pay a lot of money?