The explosive growth in smartphone adoption, from zero to a billion unit sales, has created opportunities for developers and organisations of every shape or form: massively successful apps are being built by garage entrepreneurs and established software houses alike. This, and the relatively low barriers to entry into mobile development, have attracted hundreds at thousands of developers to the app economy. With the exception of some developers that “are not in it for the money” (as indicated by 16% of our sample), most developers or organisations that invest in mobile are in fact looking for a return on their investment.
But while some are making it big, the majority are not seeing the returns they were expecting. Our latest Developer Economics survey shows that 60% of developers are below the “app poverty line”, i.e. earn less than $500 per app per month. So while there are opportunities, app monetisation suffers from the same income inequality that is evident across so many industries.
Apps as a product vs. apps as a channel
With rising maturity in the app economy, business models have become sophisticated, too. There are two dominant types of business models that e see:
- Apps as a product, which call for direct monetisation, via paid downloads, in-app purchases, or contract development
- Apps as a channel. which aim for indirect revenues via cross-app promotion, brand promotion and e-commerce.
Contract development is responsible for 56% – over half of the app economy for 2013 as we found in our App Economy Forecasts report. More importantly, it’s risen as the most popular revenue model, with 26% of app developers now developing apps on commission. As tens of thousands of brands extend their digital footprint into mobile apps, developer talent is in shortage. This is clearly reflected in the median revenues of $1,500 per app/month that are much higher than any other direct revenue model. Commissioned apps are also a much lower risk option for developers than app store sales.
In-app advertising is the low-hanging fruit and as such remains one of most popular revenue models, at 26% of app developers, particularly strong on platforms where demand for direct purchases is weak, such as Windows Phone and Android. Ad revenues are only rewarding on apps with a user base in the millions: while revenues on superstar apps may be very high, the median revenue for developers using advertising is $150, among the lowest across all revenue models.
Pay-per-download (PPD) has dropped considerably in overall popularity. It remains quite strong on iOS (adopted by 27% of developers that use iOS as their main platform) but has slipped below in-app purchases (IAP) used by 30% of iOS developers, while median PPD revenues are also lower than IAP revenue. The in-app purchase model continues to gain in both popularity and revenues, as users find it more comfortable to pay for apps during use, i.e. as they derive value from them and not based on what the app says on the box.
The shift in revenue models from pay-to-buy to pay-as-you-use has first appeared in apps but we believe it will also extend to other digital goods. Early examples are e-books (pay as you read) and physical goods (e.g. pay as you drive insurance). We expect that the Internet of Things, i.e. the ability to digitally connect physical objects, will be the agent of change that will cause a massive shift from pay-to-buy to pay-as-you-use revenue models for many physical goods.
Subscriptions remain a lucrative revenue model with a median revenue around $750 but, as we’ve highlighted in previous reports, this is a revenue model that is viable only for organisations that can deliver a compelling value proposition with the right content or service that will justify an ongoing subscription. On top of that, asymmetric competition, in the form of free services undercutting paid-for services is always a risk for those offering subscription-based services
Turning apps into e-Commerce dollars
Our research found that e-Commerce sales grew significantly in popularity as a revenue model from 5% in Q3 2013 to 8% in Q1 2014. The rise in e-commerce is a clear indicator that app ecosystems are evolving beyond apps and digital content into fully fledged e-commerce platforms. According to research by IBM Digital Analytics Benchmark, on Thanksgiving and Black Friday 2013, 25.8% and 21.8% of online sales in the US were completed on a smartphone or tablet, respectively, while mobile traffic accounted for 39.7% of all online traffic. More importantly, our Developer Economics Q1 2014 survey found that the median revenues of organisations involved in e- Commerce are $2,750 per app/month, by far the highest among all app revenue models that we track.
e-Commerce is becoming a critical component of the app economy as mobile sales soar year after year. While e-Commerce revenue was only 11% of the app store sales in 2013 (see our App Economy Forecasts report) our Q1 2014 research points to a very fast growth. The growth of app-enabled e-Commerce business is signaling a shift in the role of developers from innovators to value-adding resellers. Amazon is driving this shift with its Mobile Associates API, which allows developers to sell physical goods and earn referral fees via their apps, allowing easy access to a new revenue stream for developers. Apple and Google may soon follow suit.
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