After WWDC, and as Apple’s AppStore launch grows closer, the quality of public discussion around the iPhone as a platform is increasing. For instance, see Paul Kafasis’ thought-provoking ‘What Should iPhone Applications Cost?‘ on O’Reilly’s Inside iPhone (including the comments). I can’t speak to what iPhone applications should cost, but I can give my opinion on what they will cost – not particularly much, and less than many are assuming. I helped found a company based on the assumption that developers will need multiple ways to make money. Here’s some of my logic.
At first, for paid downloads from the AppStore, the price point problem looks pretty simple. At high prices you’re going to sell low volumes, at low prices you’re going to sell high volumes, and the challenge is to figure out the values that maximize your revenue, which is just your price x your volume. (This is assuming your incremental costs of a sale – customer support, backend servers, licensed data – are negligible. Depending on your business, this might be a big assumption.)
Of course, the problem’s complicated by the sheer number of people developing, and the odds of them making an equivalent good and undercutting you on price. Say, for instance, you’re developing a solitaire application. You’re likely not the only one developing this. If you sell yours for $9.99 and someone else is selling theirs for $4.99, unless your application is absolutely magnificent, you’re not going to sell many units. So you price yours at $3.99. Then your competitor prices his at $2.99. Then someone who built a pretty decent solitaire game for the love of programming starts giving it away. (Maybe an open-source iPhone solitaire project takes off.) Houston, we have a problem. And I don’t think it’s confined to relatively common applications like hold ‘em poker or Flickr uploaders or Twitter clients. Users are fickle – one unique and entertaining game at $9.99 is going to face a lot of pressure from another unique and entertaining game at $4.99. Even developers of unique applications face the risk of imitators.
Now, the ideal way to defend your application and its price point is to build something that draws its value from the size of its community. If your application is subject to Metcalfe’s Law – where the value of a network increases exponentially with the number of users – then if you can get the most users using your application, you win, even against competitors undercutting you on price. Social networking applications are a great example of this – you use them because that’s where your friends are. So is any application with user-generated-content (reviews, for example), and any multiplayer gaming application. Get the users, and you can defend your business (and your price point.) However, there’s another dynamic at work here – since the usefulness of the application is dependent on the number of users, you’ve got to do what you can to bring users in the door. Price your application too high, and you won’t get the initial userbase. The very need to attract as many people as possible – before your competitors do – is going to force you to price as low as you can bear. (Many applications subject to Metcalfe’s Law – especially if the companies behind them have outside sources of funding – will undoubtedly distribute their applications for free and look for ways to make money later, when they have an audience.)
Due to the amount of competition (it’s a great platform, there’s a lot of interest in it, and I’m predicting a gold rush) and the need to attract a critical mass of users, I see a lot of downward pressure on iPhone application prices – especially in applications that are marketed to the public at large. (Niche applications for specialist users or applications dependent on expensive licensed data are another story.) So what’s a developer to do? There’s a few options:
1) Buyouts. Don’t worry about revenue now, try and grow the application as big as possible, and then sell it to a company specializing in application rollups. A risky but possible option. I predict the iPhone applications market will share certain characteristics with the Facebook applications market, and one of those characteristics will be the emergence of rollup companies – entities that attempt to buy popular applications for less than they think they’ll eventually be worth to try and create some synergy between them. (Who’s going to be the iPhone equivalent of a Slide or RockYou?) You’d have to take outside funding if you need money in the meantime to pay your bills and continue development.
2) Data sales. An interesting option, currently being done by Sense Networks, which produces the mobile application CityScape. Sense Networks is funded by a hedge fund, which will presumably use the location data it gets from users to pick stocks. Ingenious – I’m watching this one with interest. But for an application developer to go this route before they’ve hit critical mass, I think they need pretty good connections and business development. It does raise potential privacy concerns – you’ll have to make sure the terms of service cover what they need to.
3) Subscription models. Give the application away but charge for access to it over time. As far as I can tell from the publicly-available information, Apple’s doing nothing to support this line of business, but it’s technically possible – probably by means of buying subscription codes from a website and entering them into the application. (Don’t ask me if this violates any terms of service with Apple – I’m not personally interested in the subscription model and therefore haven’t done the investigation myself.) This might be nice – it lets people try your application for free while still securing a revenue stream. (Hey, look at World of Warcraft.) But it’s still taking money directly from the users and therefore is susceptible to undercutting.
4) In-application sales, virtual or real. Structure your application so it sells a virtual or physical good. For physical goods, I’m thinking of that old customizable sneaker company, Customatix (no longer with us) – design the shoes, buy the shoes, get them shipped to your door. Concert tickets are probably the killer good here. Virtual goods are even more enticing – create a roleplaying game where everyone can play, but you can buy extra turns or fancier clothes for cash (likely converted to an in-game currency as an intermediate step.)
5) Lead generation. Either have interested users fill our a form and sell the information to service providers, or send people within your application to another site where they’ll fill out a form and sell the information to service providers. Really requires the application to be suited for the lead generation business – for instance, you could see a pocket renovation guide giving the user the opportunity to get in touch with a local contractor. Requires a lot of business development or getting in touch with an already existing lead generation shop.
6) Advertising. This is the revenue model that, in my opinion, is going to be the big one – just like it is on the web today. (Our investors agree, and so does at least one partner at Kleiner Perkins’ iFund – Matt Murphy said “the vast majority of applications will be ad-subsidized.“) In the face of downward pressure on application download prices, advertising still allows the developer to earn revenue per user – and the more addictive the application, the better it is for the developer. By not charging the end-user, developers ensure maximum distribution for their applications, allowing applications dependent on network effects to grow as broadly as possible. Advertising has only a modest negative effect on distribution – while a small minority of people actively avoid it, the vast majority of people correctly view advertising as the price of free content. (And the small minority of people who strongly object to advertising can always be swayed by a paid, ad-free version.) As long as the user experience is always put first, I believe a quality application with advertising can beat a free application without it.
So, how do you get ads in your applications? You can sell the space yourself, although doing the business development, getting the proper contractual agreements signed, and then arranging for the ads to appear in the application in the appropriate spots (and providing the appropriate reporting back to your advertisers) does take some work. You can try to force an existing mobile or desktop ad network into your application – again, with a little work – but this isn’t without risk, since a) you’re likely breaking a term of service or two by forcing the ads in there, and b) the ad units probably aren’t designed for the iPhone, causing problems. (For example, the last thing you want is to use a mobile network that shows downloadable ringtone ads on an iPhone – ringtone downloads might be a big part of current mobile marketing, but on the iPhone, they’re irrelevant. Or the ad units might assume they’re in a browser and rely on browser functionality your application just doesn’t have.)
Another option: go with an advertising network that’s built with the iPhone developers specifically in mind. (Self-promotional portion of the post: among other things, that’s what we do here at Pinch Media.) The ads and their insertion are tailored to the iPhone SDK, and the ad network takes care of the business development. This is still a young market, and the services supporting developers are just as new as the applications – but I fully expect a variety of them to emerge over time. We’re working as fast as we can to sign up advertisers and get our services out to the developer community.
I’d love to get others’ thoughts on monetizing iPhone applications, iPhone application price points, and which business models are going to be predominant. (I’m especially interested in business models I may have missed.) Will the iPhone application market resemble the Apple application market, or will it wind up being closer to the web, where the predominant price point is ‘free’?
