App Developers & App Stores: Misaligned Objectives

There was some interesting news last week about a new investment fund for early stage stage ventures focused on mobile applications. Any early stage funds availability is good news for technology entrepreneurs in the Ottawa region, and it certainly caught my attention considering my own interest in mobile apps and Android. Regardless of how the fund will operate, any company hoping to tap into this source of capital will need a credible business plan. For mobile app developers, this is no easy feat.

A large majority of apps on iPhone (85,000+) and Android (10,000+) are either free or are not generating enough revenue to pay the developer's home utility bills, let alone achieving profitability. The odds for success are much better than lottery tickets, but there is a lot more to being successful than coding like mad for a few weeks and then praying for the money to come rolling in. Tapping into the consumer market is particularly fraught with peril since it is so very hard to predict how the market will respond. This is anathema to developing a workable business plan unless there is already some market success for a core part of the planned functionality from which revenue extrapolation can be reliably attempted. Going after the enterprise market is safer since the prospective customers will buy if they have a good business case for a product, and that determines the app's revenue prospects. Setting yourself up so that you're subject to the whims of consumer tastes of the moment will not endear you to investors.

What we need to consider is just what the business model actually entails when selling mobile apps, regardless of the target market. The majority of mobile apps are distributed through app stores run by Apple, Google, Microsoft, RIM and Palm, for apps that are designed for their own brands of mobile OS platforms. There are third-party stores and possibilities for carrier stores (although Verizon, in their announcement this week, surprisingly to some, claimed their Android phones will rely on Google Android Market), but we can discount these parallel distribution channels for the present. Because of developers' reliance on these app stores for marketing, distribution and payment processing, for which they pay a price (typically 30% of sales revenue, split between the app store operator and the carrier in most cases), it is important to assess whether this "partnership" is to the benefit of both parties.

For the platform vendor (which is the same as the device vendor in the cases of Apple, RIM and Palm), there are two key benefits of an app store:

1. Increase the value proposition to users by making available a large pool of applications; and,
2. A revenue stream that is additive to device sales or OS licensing.

Palm and Microsoft are particularly lagging with respect to the first point, while Apple and Google are in the lead. This then raises the question of just how large the catalogue of applications must be to be seen as beneficial to the platform or device vendor. I don't know where that threshold lies, only that it must be somewhere between 500 (above the level Palm has achieved) and 5,000 (lower than what Android reached a few months ago), and there must be apps for popular mobile activities (Facebook, weather, Twitter, email, etc.). If we accept that there is, or soon will be, parity on the latter point, we need only consider the size of the app catalogue. I think that above some number of apps, having more adds nothing to the value of the catalog since it is effectively infinite from the perspective of most users. On this basis, iPhone and Android are equivalent (except in the eyes of inferior market commentators who like to keep score).

With regard to the second point -- revenue -- the dynamics are far more interesting, and telling. I have seen a number of contradictory stories of how much money Apple is deriving for their app store (either very large or very small), and how much of that is shared with carriers. Even if the true number is toward the high end, the reported figures still pale in comparison to the revenue derived from iPhone and iPod. That is, it's a nice pile of money but not enough to get too excited about for a corporation the size of Apple. In the case of Google, the amount must be far lower since we know that the majority of the 30% fee goes to the carriers, and there is much lower success rate of paid apps on the Android Market. (Google, as I'll discuss, has little incentive to do better.)

Putting these facts and projections together, I conclude that the primary objective is the first point: increasing the device value proposition by providing users with a large catalogue of applications, both free and paid. The problem for app developers is that Apple and Google have already achieved this objective, and therefore have little incentive to make any further attempts to help app developers to succeed. App developers would obviously prefer that their so-called partners' primary objective were to maximize app revenue, but that is not the present situation. We should expect the same to hold true for RIM, Microsoft and Palm when or if they pass the same app catalogue threshold.

My conclusion is that the business objectives of app developers and the app stores are not the same. Hoping and complaining will not change this. Even when the focus is on revenue, there is still a misalignment. For example, consider this assessment of where Google's priority lies:

"Google views mobile phones as an important way to extend the growth of its online advertising business, as people around the world increasingly access the Internet from smartphones.

Analysts believe that mobile phone ads have the potential to be more lucrative than Internet ads viewed on PCs, given the that mobile ads can take advantage of an individual's physical location to better target a marketing pitch."

Of course, Google's advertising revenue objective is not restricted to Android, but to all mobile platforms.

The app stores, while a tremendously useful distribution platform for marketing and sales, must not be relied upon to assist developers to create a strong business plan. They aren't hostile, it's just that they simply don't care enough. Hoping and praying for new features and resolution of longstanding problems is not acceptable behaviour for those serious about building a business. One way or another, each mobile app entrepreneur (as distinguished from a mobile app developer) must build a business plan that does not have this dependency. The app stores are a tool, not business partners who have a shared financial interest in your success. Write your own ticket by removing this high-risk dependency from your business plan.