Reading the Apps are too Cheap post by Dave Addey (an excellent read by the way) got me thinking about a not so obvious point that Dave made. The financial drive of the App Store by Apple is currently in complete opposition to that of iOS App Developers. As Dave points out in his post Apple makes its money by selling hardware with very healthy profit margins and is currently benefiting greatly from inexpensive or free apps in the App Store adding tremendous value to that hardware (these apps bring functionality to the device that hardware alone can't provide). Compare that business model to that of iOS App Developers. App developer income is made in one or a combination of the following ways:
- 70% of the proceeds from the App Store purchase price (if its a paid app)
- 70% of the proceeds from in app purchases
- 70% of subscription based revenue
- Proceeds from advertising revenue
The 1st 3 methods are all tied to the purchase price or subscription rate, which in turn is driven by competition. The more competition that exists the lower the app price must be to remain competitive. Apple's iOS platform popularity has attracted an incredibly large developer community which has driven the average price of individual apps lower and lower over time. The lower the asking price for an app the lower the potential income for App Developers. Apps are getting more and more complex and capable over time and that complexity comes with a price...more effort/time by app developers. So, with the time required to develop an app going up and potential App Store revenue going down, the future for iOS development comes into question. How can these conflicting financial drivers be resolved such that both Apple and App Developers can continue to thrive in the future?
A Common Goal
When you have conflicted goals like this sometimes all it takes is to look the problem from the next higher level to find some common ground. A common goal does exist between what drives Apple's profits and what drives iOS Developer's profits and that common link is a satisfied end user that is willing to pay for the hardware and services (apps) being offered. The problem that remains is that both Apple and the iOS developers are competing against each other for a finite amount of money users are willing to pay for the combined package of the iOS hardware and they apps they purchase to run on that hardware. Apple would rather make their money selling the hardware because they get 100% of the profits from that purchase vs the 30% they get from app purchases.
Apple has never been interested in competing at the lower price end of any market they compete in...personal computers, music players, smart phones and tablets. However, it seems that Apple has been complacent when it comes to the App Store and the race to the bottom for the pricing of applications. Why should Apple intervene with the trend of more and more developers going the route of free apps? App Developers just like hardware manufacturers have to pay their bills and earning enough profits from a "freemium" app model is a very challenging proposition. If Apple wants to ensure that the App Store continues to bring extraordinary value to their iOS devices they are going to need to take some steps to allow developers to profit without frustrating their customers. I wrote a blog post that talks about a bold move that I think Apple could take to reset the minimum price in the App Store and bring back a sense of value. But this concept of "free apps" has been allowed to go on for long enough now that I fear Apple may not get the genie back in the bottle. So here is what I propose Apple do to reverse this disturbing perception that iOS apps should be free:
- Implement my recommendations from my Changing the App Store Game post (essentially...no more free apps in the App Store)
- At the same time Apple should issue App Store credits to all iOS users (both current and new)
- Every new iOS device would come with a $100 App Store gift card
- Upon initial rollout, all existing iOS owners could apply for an App Store Credit
- Devices less than 1-year old would get $50
- Devices between 1-year old & 2-years old would get $25
- Devices older than 2-years would not be eligible for an App Store Credit
With hundreds of millions of iOS devices currently in use and hundreds of millions sold per year I am talking about Apple forking out billions of dollars here. This may seem like a crazy idea (ok, it is a crazy idea), but Apple has done some very serious damage to the consumer’s perception of value for applications. While these incredibly low asking prices for apps might be sustainable now while Apple is dominating the marketplace for paid-for apps as well as several of the mobile device hardware categories, this may not always be the case. What will happen to developers if the iOS user base erodes due to other devices and app stores taking hold? What will happen to developers as more and more developers release free apps to the App Store and it becomes even more difficult to compete for even a free download? I think Apple has an opportunity here to reverse the perception of value for mobile applications. Samsung is currently paying developers to develop for their platform and they are doing so because they need to turn the tide on Apple and bring developers to their platform. I fear that if a company like Samsung or Microsoft can get a foothold against Apple and do so while having a substantial number of their apps being “paid for” apps, then it might be too late for Apple to re-inject value back into the App Store. Right now the “value” that Apple brings to the table for developers is the sheer number of customers. Developers know that they only need a very small percentage of customers that download a “free” app to either click on an ad or make an in-app purchase to turn a profit. But we may soon reach a point where its hard to get enough users to even download a free app due to App Store saturation. Let’s hope it doesn’t come to that.