Mobile App Mania

All these factors -- fierce competition, high churn, the lure of low prices -- make business in the App Store a treacherous experience. Perhaps as a consequence, some of the most active developers aren't in it for sales from downloads. Instead, they're looking for an audience. AdMob, one of several companies hoping to make mobile phones the next great advertising medium, is currently serving ads in more than 700 iPhone apps. "In general, people are projecting that the interactive-ad market will be flat to slightly down this year," says Omar Hamoui, AdMob's CEO. "On mobile, it's still growing." Moreover, customers don't seem to mind banner ads in their mobile apps. About 1% to 2% of people even click on the ads -- about 10 times the rate people click on Web ads.

That kind of enthusiasm has pushed marketers to create their own branded apps. Target, Coca-Cola, Nike, Kraft Foods, and even Pedigree can be found in the iPhone store. The dog-food company's app lets you upload a picture of your best friend and record his bark -- and then, shake your phone to listen to Rover wherever you go. "You can't get that connection with any other media format," says Tina Unterlaender, acting management supervisor for AKQA Mobile, a San Francisco agency that creates apps-as-ads for major brands. "The app knows who you are, where you are, what time of day it is -- you can give the consumers everything they need when they need it, and you can't do that anywhere else." The upshot is increased loyalty and sales. "Our business is stronger since Nike+," says Trevor Edwards, the Nike executive who championed the Apple-powered service. "Nike+ has become part of customers' lives as runners."

Of course, the main brand succeeding in the App Store now is Apple -- so far the one unquestionable winner on this new platform. The company rules the business with an iron fist. Over the past few months, developers have complained about the length of time it takes for Apple to review programs before they show up in the store. Worse, without much explanation, Apple has arbitrarily rejected several apps, including a utility that lets people stream podcasts, a game that allows you to hoist Barack Obama on a trampoline, and a program that features characters from South Park. It's here that Apple's rivals see an opening. Google's Android project, in particular, has sought to attract developers by touting the store's "openness." "We believe it's important to reduce barriers that make it difficult for developers to get apps to users," says Eric Chu, Google's mobile-platform program manager.

But at some point, it's going to become too late for rivals to catch up with Apple. The App Store, just like Microsoft's PC hegemony, succeeds on network effects: Every time you buy an app, you're tying yourself ever more tightly to Apple's mobile platform. This only makes the platform more attractive to developers -- which, of course, keeps us buying more apps. It's a vicious cycle. Unless you're Steve Jobs, in which case, it's genius.