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Software Report: Apple App Store Could Become $1.2B Business in 2009
Shane McGlaun (Blog) - June 11, 2008 12:50 PM

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46 comment(s) - last by StupidMonkey.. on Jun 12 at 11:35 PM

iTunes App Store (Source: Apple)

Three scenarios for App Store add between 1 and 3% to Apple's operating income

With the announcement this week of the new iPhone 3G and the pending launch of the much anticipated App Store, analysts are saying that the Apple App Store could balloon into a $1.2 billion business by 2009.

The App Store holds so much promise that AppleInsider reports investment bank Piper Jaffray is telling investors to give the Apple software announcement as much attention as they give Apple hardware announcements.

Analyst Gene Munster devised three possible case scenarios for the App Store, with the $1.2 billion prediction being the best of the three. In total, the three scenarios have the App Store adding 1% to 3% more operating income to Apple by the end of 2009.

Munster came to his scenarios by making assumptions from the data Steve Jobs offered on iPhone usage from the WWDC keynote speech on Monday. According to Jobs, 98% of iPhone users use the web, 94% use email, 90% send text messages, and 80% of users take advantage of 10 or more of the iPhone’s features.

Munster says, “Mobile service adoption rates show that iPhone owners are more sophisticated mobile users, likely a result of both the user profile and the device itself. The bottom line is that we expect similar adoption of the App Store to other advanced services.”

The three scenarios are broken down into conservative, neutral and aggressive with the neutral scenario assuming that 77.7 million App Store users will buy and download at least two applications from the App Store each year at an average revenue per application of $10 (with one download being free). This amount of usage would generate sales of around $777 million with a profit of $163 million.

The most conservative of the cases would result in an additional $75 million in profits for Apple on $416 million in sales from the App Store. Use of the App Store could be much higher if apps are released that address the short coming of the iPhone like the lack of voice dialing or other features that the vast majority of iPhone users want.

The iPhone 3G and details of the App Store were announced at the WWDC keynote Monday.

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seriously?

By omnicronx on 6/11/2008 1:04:58 PM , Rating: 2

Sorry Apple, but I just don't see it, especially with opensource OS's like google's android on the horizon. To think that every Iphone user is going to buy 2 app each is rediculous , especially considering Iphone will also be going somewhat open source in the months to come. Unless all of this revenue is going to be drivin by the adds that are displayed when browsing the products, I just don't see it.

RE: seriously?

By Natfly on 6/11/2008 1:21:06 PM , Rating: 2

I think 2 apps per user is a possibility and somewhat likely.

What I don't get is the 30% fee Apple charges to publish an app. It seems pretty high. Is it required for apps to published on the store, or is it possible to install apps via a different method legitimately?

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RE: seriously?

By FITCamaro on 6/11/2008 2:08:36 PM , Rating: 3

Yes I believe the only way to get an app legitimately is through the store. Developers can create apps for free though which cost nothing to post and nothing to "buy".

Expect hackers to find ways to get apps onto the phone without going through the store.

As far as the 30% cut that Apple wants, its absurd. Apple is doing nothing but providing a means to easily find applications. And its not even really needed since developers could just write an installer and offer their app for download elsewhere if the Store didn't exist.

I see a lot of free apps coming out. But for people who want to make money, if it were me, I'd be pretty pissed that Apple wanted a 30% cut of the $5-10 I'm asking for my application. Same with the game developers for the phone. It's hard enough for them to make money. But for Apple to charge a 30% cut, that means they either have to eat it, or raise the price of the game 30% which means fewer people will buy it.

Typical Apple though.

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RE: seriously?

By vapore0n on 6/11/2008 2:18:59 PM , Rating: 2

Well, they provide the SDK and the publicity and the means for legally installing the app (vs the low % of people that hack theirs). The developer just needs to come out with something good.

ibvoteddown

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RE: seriously?

By FITCamaro on 6/11/2008 2:22:26 PM , Rating: 3

Yes but a 30% fee simply for providing a place to host the application is absurd. If it was 5-10% that'd be fine.

Developers should just be able to create applications and let people download them via the web. They shouldn't require the store at all.

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RE: seriously?

By plinden on 6/11/2008 3:25:33 PM , Rating: 3

Most developers who have commented on the 30% fee are happy with it. It's a fee to provide the following advantages:
1. One place to go and buy. Impulse buys are likely to be large percentage of sales when you come across something while browsing, which is unlikely with the "I want app X so I'll go to app X's website" scenario.
2. Hosted on Apple's servers.
3. All financial transactions are handled by Apple.

Those are not big advantages for large software companies, but for small and lone developers, it can't be beaten and levels the playing field somewhat.

Developers can also set their own prices, be it free (another report out today says 70% of apps are expected to be free) or with 30% extra added.

For users, the advantage of the App store is that they're guaranteed to work and be relatively secure and stable.

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RE: seriously?

By paydirt on 6/12/2008 10:02:40 AM , Rating: 2

selling downloadable applications is a potentially high margin business. If you're an application developer, this can still be very lucrative. Just ask the guy that made that music game that is downloadable on Steam. He basically became a millionaire overnight.

You only need to make the software and set a price, you don't need any of the other overhead.

Also, Apple created the market that you would be selling into by developing the iPhone and selling a bunch of iPhones and lowering the price of iPhones.

If I wasn't successful in my work, I would either be developing or financing app developers for 360, Steam, or iPhone.

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RE: seriously?

By michael2k on 6/11/2008 3:32:56 PM , Rating: 2

There are two alternatives to iTunes distribution:
Ad Hoc, where you and 100 iPhones can self-install apps
Enterprise, where you register the enterprise phones and also do self-install

Ad Hoc I think costs the standard $100 dev fee, but otherwise nothing; I don't know how much Enterprise costs, if you need your own server, or what.

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RE: seriously?

By kelmon on 6/11/2008 4:37:44 PM , Rating: 2

No malware this way. I'm sure Apple are going to be draconian on what can or cannot be supplied through the store (I'm waiting to see what happens when an alternative web browser is developed), but the end-user can be assured that whatever is supplied via the store isn't going to do something bad to their device because everything is checked and tested first.

From a business perspective, everyone's a winner, and 30% is absolutely fine.

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RE: seriously?

By Magnus Dredd on 6/11/2008 3:23:46 PM , Rating: 3

They are hosting the files with no further costs for bandwidth.
They are doing all credit card processing, tracking, and management of money.
They are the service of adding the application to a directory service.
They are doing some promotion.
They are doing certification testing?

Have any of you guys ever looked at the costs associated with all that?
how much does it cost to get Microsoft to certify your app for Windows Mobile?
I'd bet it costs more than $99 + 30% for a small developer. You can't even get the IDE for that much.

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RE: seriously?

By kelmon on 6/11/2008 4:33:00 PM , Rating: 2

Yeah, there's a lot of plus points to the deal. The most important bit, however, is that an end-user should have a higher degree of trust that what they are installing is quality software, assuming that Apple does their job properly and can cope with the volume of application submissions they are going to get. Of course, we'll need to wait and see what the release quality is like to see if that aspect of the deal is worth it.

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RE: seriously?

By Pops on 6/11/2008 1:25:37 PM , Rating: 2

I agree it seems unlikely.

"77.7 million App Store users" where are these 78 million users from? I thought only 6 million iPhones have been sold so far? And Jobs predicted 10 million in the first 18 months, a goal that has not yet been meet?

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RE: seriously?

By Brandon Hill

(blog) on 6/11/2008 1:29:01 PM , Rating: 2

You forget the iPod touch -- same architecture, interface, software capabilities...

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RE: seriously?

By othercents on 6/11/2008 2:17:38 PM , Rating: 2

quote:
To arrive at his estimates, the analyst initially conceived a neutral case scenario in which he assumed 91% of a market comprised of 85 million multi-touch handheld users (61.6 million iPhone users and 23.4 iPod touch users) would at one time or another tap into the App Store during the course of a year.

The article says 61.6 mil iPhone users by CY09 and 23.4 iPod touch users. The numbers are not right.

Other

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RE: seriously?

By glitchc on 6/12/2008 8:00:06 AM , Rating: 2

Might be a misplaced period... 6.16 and 2.34 respectively.

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RE: seriously?

By biggsjm on 6/11/2008 1:35:58 PM , Rating: 2

they mean by end of 2009 worldwide. Munster's a little optimistic considering we don't know how many free apps there will be (which would cost apple and generate nothing).

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RE: seriously?

By 67STANG on 6/11/2008 1:46:55 PM , Rating: 2

Let's not forget the 5-year exclusive agreement with AT&T. While people are getting these to work on Sprint, etc.-- they will be missing out on VERY large portion of the cell phone market called: "Verizon". After the Alltel merger, Verizon will have a projected 9 million more subscribers than AT&T... Not a lot of people jump service just for a phone...

Since AT&T has a total of ~71 million subscribers, this goal seems highly unlikely.

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RE: seriously?

By FITCamaro on 6/11/2008 2:12:24 PM , Rating: 2

Uh...you can't get the iPhone to work on Sprint. They use CDMA. Same with Verizon. The original iPhone you could get to work with TMobile and other GSM providers.

However the new iPhone it seems might be AT&T only because it appears they will only be selling them in Apple stores or AT&T outlets. No online pre-orders. And it seems that in order to leave the store with one, you might have to sign up for a contract.

But yes they are robbing themselves of the huge Verizon and Sprint customer bases. I honestly would consider getting an iPhone if a) I didn't have to use AT&T and b) I could choose what type of plan I wanted. Not have Apple and the provider tell me what plans are available just for that phone.

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RE: seriously?

By 67STANG on 6/11/2008 2:52:45 PM , Rating: 2

My bad, somehow I got TMobile and Sprint mixed up. Perhaps because they both blow...

I know Verizon uses CDMA, that was the point of my post...

I was at the Verizon store yesterday getting my "required to drive in California starting July/2008 bluetooth headset" and asked the manager when he thought the IPhone would be on Verizon. He said "Probably never." He said that he gets asked that all the time.

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RE: seriously?

By ninjit on 6/11/2008 2:14:49 PM , Rating: 2

the iPhone is currently GSM only, both Sprint and Verizon use CDMA.
So no, nobody is "getting these to work on Sprint, etc.".
T-mobile is the only other carrier I can think of that uses GSM in the US, and I have read news of people unlocking the iPhone to work there.

Also, the reason why carriers are so eager to sign exclusive agreements (that even cost them more, as in the prior AT&T/Apple revenue sharing) is precisely BECAUSE people are willing to jump service just for a phone - a lot of people did just that for the iPhone.

And I think Mr. Jobs' sales target for the iPhone is for worldwide sales, and not just adoption within the US.

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RE: seriously?

By FITCamaro on 6/11/2008 2:19:00 PM , Rating: 2

quote:
And I think Mr. Jobs' sales target for the iPhone is for worldwide sales, and not just adoption within the US.

It's a simple matter to switch a GSM antenna for a CDMA one. Or simply build both in.

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RE: seriously?

By plinden on 6/11/2008 3:38:31 PM , Rating: 2

quote:
It's a simple matter to switch a GSM antenna for a CDMA one.

Perhaps switching the antenna would be possible, but afterwards the phone wouldn't work on either CDMA or GSM networks.

It's like asking if you can use an AM radio as an FM radio. Yes, you can change the antenna, but it's still an AM radio inside.

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RE: seriously?

By aeroxander on 6/11/2008 1:36:24 PM , Rating: 2

Umm, don't agree with you. How do you figure that people that are spending at minimum of 200 dollars on their iphone, plus paying the money that they are for the phone plans that it is ridiculous to consider that they would spend conservatively 20 bucks a year to get 3rd party apps for their iphone. I think it is very sound logic to say 2 apps. However I do agree with everyone else with the number of people actually doing that, hmmm wonder where this number is coming from, however I'm sure they've got their sources.

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RE: seriously?

By Spivonious on 6/11/2008 1:45:37 PM , Rating: 2

For every person who never buys an app, there's someone who has 10.

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RE: seriously?

By darkpaw on 6/11/2008 2:25:33 PM , Rating: 2

Not for everyone person. Maybe for every 20 people that never buy an app there will be one with 10 and several with a few.

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RE: seriously?

By StupidMonkey on 6/11/2008 4:55:41 PM , Rating: 2

"According to Jobs, 98% of iPhone users use the web, 94% use email, 90% send text messages, and 80% of users take advantage of 10 or more of the iPhone’s features."

These numbers are marketing FUD. 98% web and only 90% text... Seriously? SERIOUSLY?! Not even remotely close to possible. Switch those numbers around and you might have a winner. It is NOT a reality that more people use the web than text. I know iPhone users who dont even know how to use the phone properly but know how to text. I know zero people that have the opposite problem.

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RE: seriously?

By plinden on 6/11/2008 5:08:48 PM , Rating: 2

You should try to learn not to apply your own experiences generally.

If I did so, and thought everyone else used their iPhone like I use mine, then everyone would be using the web browser a couple of hours a day, no one would be using EDGE (since after all, everyone has WiFi at home and at work), and everyone would be making maybe two SMSs a month (since, of course, everyone uses email or the phone to stay in contact).

So in my experience, few people use SMS (although your experience may be different) and more use the web. In Google's experience - http://www.appleinsider.com/articles/08/02/14/goog... - it gets 50x more requests from iPhones than any other mobile handset

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RE: seriously?

By StupidMonkey on 6/11/2008 5:29:36 PM , Rating: 2

Albeit a cool link, its appleinsider.com. If it was everythingcellphonesinsider.com I'd take it with alot more weight. As opposed to taking my generalizations, how many people do you know that use the web and dont text?

These are 2007 Statistics:

"In the United States, text messaging is also popular; as reported by CITA, the average number of text messages sent per subscriber per month was 188."

--Source Wikipedia -- Dont blast the source, look at who Wiki sourced.

"According to both the Mobile Marketing Association and Pew Internet & American Life Project Surveys, 40% of US Mobile phone users text. The split by age group is as follows: 13-24's: 80% text, 18-27's 63% text, 28-39's: 31% text, 40-49's: 18% text."

--Source Wikipedia -- again, they are referencing someone else with abit more credit.

I'm searching for a non-biased look into mobile web usage, when I find it, I will post it here.

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RE: seriously?

By plinden on 6/11/2008 5:34:44 PM , Rating: 2

That was just the first link I clicked on when I did a google search for the story I'd read some time ago.

Here's a non-AppleInsider-related google search link - http://www.google.com/search?q=google+search+on+ip...

That took me all of 5 seconds to check for myself.

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RE: seriously?

By StupidMonkey on 6/12/2008 1:25:21 AM , Rating: 2

As per your searches....

"Of course putting these statements into some kind of context is vital. Firstly, I'm guessing we are talking 50x more proportionately rather than 50x more in total given that Nokia sold 133.5m handsets last quarter to Apple's 2.3m, though this can't be taken as read. Secondly, Google is the default integrated search engine in the Mobile Safari browser and thirdly, Google has specifically customised its pages to be more intuitive for iPhone users with direct access to Gmail, Calendar, Reader, etc."

(Source: http://www.trustedreviews.com/mobile-phones/news/2... -- which sourced Financial Times)

Hmmm, again, FUD from an askew tally?

And your passive aggressiveness is quite silly, which makes me wonder if you're a fanboy?

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RE: seriously?

By plinden on 6/12/2008 1:32:54 PM , Rating: 2

Of course it's absolute numbers. How could Google give numbers relative to the installed base of any particular handset? Does Google have some sekrit database with the numbers of each handset in use?

Between 1999 and 2006 I worked on several WAP applications for Openwave (still the best WAP browser out there, pity that's not saying much). I assure you, not even I wanted to use the WAP apps even though I did my best to make them usable. Once you use the iPhone (or an Opera-equipped phone) you realize what the mobile internet should be. People use the iPhone for the web because it works well.

I still don't know what's bugging you about "According to Jobs, 98% of iPhone users use the web, 94% use email, 90% send text messages..." Switching them, like you suggest would be "98% of iPhone users send text messages ... 90% use the web ..." Whoop-de-do, big difference in meaning there.

By the way, I think you misunderstand what FUD is - an example of FUD is "connect an XP computer to the internet and it gets owned in seconds" - F ear, U ncertainty and D oubt.

And again with this fanboy nonsense. Does liking my TV make me a Sony fanboy? Does liking my car make me a Honda fanboy? So it's only when you like Apple products that you become a fanboy? Seems to be that people are you are so stuck in your own rut that you can't believe that people like different things.

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RE: seriously?

By StupidMonkey on 6/12/2008 11:35:16 PM , Rating: 2

First of all, thanks for debating here with me, its nice to talk to someone who's obviously using things to their full extent.

As to the fanboy nonsense, you just seem to follow fanboy fanatacisms. I won't pretend I'm right on this, just the tone of your comments leads me in that direction.

As for the 8% difference in who uses the iPhone for what, well that leads to the amount of money that the Applestore will bring in. I'm just pointing out that the 8% means ALOT in terms of how successful this store is going to be.

Again, I thank you for your opinion! Its nice to have some solid comments shot back and forth!

Btw, I have a BlackBerry with Opera on it... wouldn't trade it for anything in the world. Opera FTW!

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RE: seriously?

By Reclaimer77 on 6/11/2008 5:09:41 PM , Rating: 2

What do you expect ? Jobs has made an empire out of spreading bullcrap.

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RE: seriously?

By StupidMonkey on 6/12/2008 1:26:40 AM , Rating: 2

Gotta give it to Apple though, BEST marketing team in the world at the moment.

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RE: seriously?

By HrilL on 6/12/2008 1:39:47 AM , Rating: 2

As an iphone owner. I used the web by far more then I ever used text messaging. I started to text less actually once I got it. I could email or go to meebo.com and use AIM, Yahoo, MSN, ICQ... AIM on a lot of phones counts as texting but on the iphone its just using the web. So yeah I did text more but they were not being counted as text messages anymore.

But I do think those #s are FUD. I know a few girls that never use email or the music and video player. They only use the phone and text message feature.

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RE: seriously?

By retrospooty on 6/11/2008 9:08:31 PM , Rating: 2

yup... new cheaper 3G iphone... good, App store? I dunno. I think they are way overestimating the cash

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RE: seriously?

By winterspan on 6/12/2008 12:16:29 AM , Rating: 2

First, many if not most of the apps available on the store will be available either free of charge or as a free basic version with a paid "enhanced" version. I'm sure advertising may play a role, but not in the form of banner advertising, and more in the form of say affiliate links to amazon.com for apps with product info/search.

Also, it surely won't take long to jailbreak the new iPhone and allow direct installation of apps via 3rd party utilies and SSH/SFTP.

However, for new users of smartphones and non-geeks, which are going to represent a large percentage of iPhone users, the App store will be an excellent addition to the device.
Just like iTunes was to the iPod, this will become a great platform because it will:

1)Be incredibly easy and convenient to enhance the functionality of your phone, especially for novice users.

2)Insure quality and security by having applications checked out by a human. UI guidelines, resource efficiency, etc will be enforced.

3)Software developers will love to be able to create applications that will run on robust hardware using modern development tools. Even more important will be the ability to easily reach nearly 100% of end users in a very convenient manner with all of the details of promotion, distribution, and payment taken care of.

The 70/30% split really isn't bad when you consider how large this market is going to be since your average user will have convenient access to your software. I wonder what percentage of existing Symbian/Blackberry/Windows mobile users routinely purchase apps for their devices. No doubt iPhone will eventually take the cake.

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Seems to ignore the effect on hardware sales

By Doormat on 6/11/2008 1:30:47 PM , Rating: 2

The $1.2B estimates are AppStore income only. And don't include people buying iPhones because of the great software ecosystem that it provides.

My estimates were $500M/yr, but that was before Apple lowered the price. I wouldn't be surprised to see 25-30M phones worldwide by the end of 2009. At 1.2B, thats about $50/yr in apps purchased. Not unreasonable - 5 $10 games - but it depends on the developers too, given the choice to monetize their products, will they or do we see a large free software contingent that isn't aimed at getting you to use some other product (e.g. eBay).

I personally plan on selling my game for $5. Even if I only sell 5,000 copies its still a lot of money.

RE: Seems to ignore the effect on hardware sales

By Lonyo on 6/11/2008 1:49:27 PM , Rating: 2

Yup, Apple have been pretty canny with this. Take a bit of a hit at the beginning through pricing of the phone and revenue sharing, but set up a system where you can keep making money in other ways so you don't lose out too much overall, which increasing marketshare potentially substantially.
Very good business move IMO.

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RE: Seems to ignore the effect on hardware sales

By FITCamaro on 6/11/2008 2:15:44 PM , Rating: 2

$25,000 - 30% Apple fee = $17,500 - 20% income tax (minimum) = $14,000

Not a bad chunk of change but you lost nearly half your money.

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RE: Seems to ignore the effect on hardware sales

By Doormat on 6/11/2008 6:04:31 PM , Rating: 2

Not really actually..

$25,000 - 30% Apple fee = $17,500

$17,500 - $12,500 contributed to my company's 401k for myself = $5,000

$5,000 - expensible computer hardware (Mac Pro, MacBook Air) = $0

I pay no taxes on that money.

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RE: Seems to ignore the effect on hardware sales

By Doormat on 6/11/2008 6:12:24 PM , Rating: 2

I should have noted that I think its $12,500 (or possibly 13,500) is the maximum a company can contribute to an employees 401k and have it be tax free without any penalties on the company or employee side. My disclaimer is that this is what my financial adviser told me a few months ago when I discussed this with him (about me and my company earning money though selling stuff through the AppStore). I'm not a financial expert or CPA.

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Probably Not

By kelmon on 6/11/2008 4:29:24 PM , Rating: 2

It's hard to say at this time, but since 70% of developers surveyed at WWDC said that their applications will be released for free, I don't see this as being a real money spinner for Apple. Developers are under no compulsion to charge for their applications, and those linked to web services will likely be free since those services are monetorised through other means (e.g. eBay will get their money via seller's commission fees, so their iPhone application will be free). I can see games doing very nicely, and independent applications, but most will be free, at least initially.

Mind you, it has been reported that Apple is encouraging developers to at least consider charging for applications deemed "good enough", through the people assigned to liaise with developers.

RE: Probably Not

By vexingv on 6/11/2008 11:52:21 PM , Rating: 2

From reports I've seen elsewhere (Macrumors, engadet, etc) the Apple liaisons who coordinate with developers are STRONGLY encouraging developers to charge for their apps. This is unfortunate and why I'm still sticking out for Android as long as I can. Also, remember that ALL apps must go through Apple. I can see either see backlogs of apps waiting for approval to be posted or Apple giving priority to commercial apps and such.

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The new way of communicating

By hiscross on 6/11/2008 1:20:48 PM , Rating: 3

Apple has this nailed. Yes, there will be hacked iPhone apps that will find their way into a large number of iPhone. However, like iTunes and Apple Stores, this will work.