A Closer Look at Those iPhone App Store Revenue Numbers

By MG Siegler

I don’t think it’s a stretch to say that Apple’s (AAPL) App Store has been more successful that even Apple ever imagined. It entered a market that had been completely controlled by carriers and handed the keys over to third-party developers to make their own apps. Just over nine months later, over 35,000 of those apps had been made which have been downloaded over a billion times. So it’s surprising when you see numbers like the ones Lightspeed Venture Partners published yesterday, estimating that Apple had made only somewhere between $20 and $45 million dollars in revenue off of the App Store. Surprising, until you dig deeper.

First, I’m not convinced these numbers are sound. While the author, Jeremy Liew, makes some good calculations, the numbers are still drawn largely from a survey. He did this because Apple doesn’t release actually numbers for App Store sales beyond the big numbers like a billion downloads. But Apple has given out what are probably better numbers than the survey results numbers over the past year. For example, back in August, none other than Steve Jobs himself said the App Store was pulling in $1 million a day in sales. Now, that was a long time ago, and the App Store has grown tremendously since then, but let’s go with that figure for argument’s sake.

$1 million a day means that Apple would be making $300,000 a day (its 30% cut). Extrapolated out over 10 months (the approximate age of the App Store), that would be about $90 million. That’s already double Liew’s high-end estimate. And Jobs would not throw a number like this out there lightly. Apple, if anything, likes to set expectations low and exceed them. For Jobs to throw out that figure and say that the App Store could one day be a billion dollar a year industry, to me means that he thinks it will at least be that big of a business.

Yes, it seems likely that the average price of apps have fallen since August given the rise of $0.99 apps, and probably that the ratio of free-to-paid apps has grown, but that’s why the daily sales angle is an interesting one to look at. No matter what ratios changed, there are also a ton more apps being downloaded — both paid and free — than there were in the first 30 days. And so if anything, this $1 million a day sales mark is probably low compared to what it’s at now.

And there’s other numbers that suggest this as well. Back in March, one analyst cut into Apple’s December quarter numbers and came out with $200 million in app sales just for that quarter. That’s probably way too high for a number of reasons — namely that it’s hard to know the ratio of iTunes/App Store/iPod accessory sales, which are all clumped together. But even if it’s way off, that’s just for the quarter, and it’s another sign that Liew’s numbers are probably way too low.

But even at $100 million, the App Store would still be a small drop in Apple’s bucket when it comes to revenue. But what Liew fails to mention in his report is that this is what Apple has always been expecting. Since day one of its unveiling, Apple has said that it did not plan to a lot of money off of the App Store. Sure, that may have been slightly disingenuous (again, Apple likes to set expectations low), but Apple’s stated rationale behind taking a 30% cut was to be able to keep the App Store up and running — not to make money.

Apple is a company notoriously mindful of its high margins, so why doesn’t it care about making a lot of money with the App Store? Dan Frommer of Silicon Alley Insider has this exactly right: it’s because the App Store is one of the, if not the, key driver of two products that are very high margin: The iPhone and the iPod touch. The App Store is based around the exact same model as its parent iTunes Store, which sells music at a very small markup in order to sell iPods. I don’t think I have to explain how well that has worked.

Another thing to think about is even with the success of the iPhone, Apple still has a very small percentage of the mobile market. Depending on the moves it makes over the next couple of years — namely getting into China and getting off of its exclusive AT&T deal in the U.S. — this percentage could grow by leaps and bounds. When that happens, App Store sales will continue to grow and thus, revenue from the App Store will continue to grow. Remember, the App Store is still not ever a year old, and for much of that time, the number of iPhones and iPod touches in the market was nowhere near what it is even today. The download pace is quickening, and the revenue pace should be as well.

Yet another variable is that Apple takes $99 a year from developers who develop for the App Store. There are tens of thousands of those. Again, not a huge chunk of money, but it all adds up.

But the biggest thing that these numbers draw attention away from is the true potential of the App Store. The reason for that is, it’s not here yet. When in-app payments launch with the iPhone 3.0 software this summer, the sky could literally be the limit in terms of how much both developers and Apple could make off of this. Yes, Apple will still take a 30% cut of these sales. And given that it has to do basically nothing more than it’s already doing to get that extra 30% — it’s pure gravy.

I think Liew’s numbers are well below the actual revenue numbers, but no matter if its $50 million, $100 million or $200 million, that’s not a huge amount of money for a company that has nearly $30 billion in cash in the bank. But going forward, that number is only going to increase both as the platform expands and as in-app purchase come into play. That’s not bad for a company that just wanted to make enough money to keep the App Store running.

Original post

Comments

[t0000]

Wow, Great article. I was reading all the ones from the previous day and they were not well thought out and the figures used were heavily arbitrary. The greatest point to be re-iterated is that Apple just wants to break even in the App store and service it's customers and developers. That's whats so great about Apple's business model, is that they can purposely not make money in one area and have all those profits shifted over to a 58 % margin product like the iPhone. There is not another Tech company that runs with this type of efficiency.

2009 May 15 08:33 AM

[Gauston in DC]

Nice article -- maybe now people will wrap their heads around how much money Apple is making from their app store which many have not really considered and instead concentrated on just total iphone, and mac sales ...

2009 May 15 09:20 AM

[Alan D.]

"For Jobs to throw out that figure and say that the App Store could one day be a billion dollar a year industry, to me means that he thinks it will at least be that big of a business."

Yes - definitely. But should the issue at hand be revenue (I can see them taking in a billion dollars a year) or profit (they'll 'only' keep $333 million of that, and we don't know how much their 'Cost of Doing Business' is for the store - operating staff + hardware + software + bandwidth + marketing + ?)... Keep in mind that the CoDB is the same for a free app as for a paid app, and that the ratio of free to paid apps is quoted as being anywhere from 15:1 to 40:1, and you'll see why there's no way to guess how much PROFIT the store makes... (As an aside, I checked, and I seem to have downloaded about 30:1 free to paid... How about you?)

I think that's why Apple isn't considering the store a 'profit generator' - they want to focus on the hardware, which is what generates the market for the apps, not the apps themselves.

2009 May 15 09:59 AM

[jmmx]

Very well done! In a comment to yesterdays post on the topic, I said that these numbers were not convincing. Good to see this idea backed up with more information.

I based my suspicion on the number of paid downloads reported. This was at only 6% of all downloads - roughly 1 out of 17. This seems terribly low to me, although I thought the ASP of $2.67 (something like that) might have been a little high.

If 50% are paid, and the average price is $1 (there are a lot of under $0.99 out there) then ASP for ALL downloads would be $0.50. This would be a total of $500 Million in 10 months. If only one in four downloads is paid this is still $250 million in 10 months. Assuming that the rate of purchases is accelerating with more customers, I think it could easily be a $1 B / annum revenue center. That is roughly $1 per share. I really do not think this is pie in the sky.

Final thought, I think if you had told Steve Jobs that they would be downloading 1 B apps in the first 10 months, he would have thought you crazy. App store success has wildly exceeded the expectations of everyone. (IMHO)

2009 May 15 10:09 AM

[LarryLarmor]

Bango has a great blog entry talking about how the App store is a bit like the "Crazy Frog" phenomenon for Ringtones. Good for stimulating the market, but as is said above, largely irrelevant in the long term.

blog.bango.com/2009/05.../

2009 May 15 11:01 AM

[Techtrader10]

What a great marketing tool! Sell someone a device and then make them pay an amount of money that they won't consider excessive to get cute programs, or programs that will make the device more usable. It's almost as if they could give the device away and collect revenue from the $1.00 apps. Like the old saying nickel and dime someone...

2009 May 15 11:49 AM

[jmmx]

Of course my previous post referred to <b>revenue</b... not income, and the article was referring to income. (I shoulda had my coffee before posting)

Still, 1 outa 4 would be 0.30 x 250M = 75M - quite a bit higher than the original estimates, and 1 outa 2 would be twice that again. I can still see in several years there being more than 100-200M income per quarter.




On May 15 10:09 AM jmmx wrote:

> I based my suspicion on the number of paid downloads reported. This
> was at only 6% of all downloads - roughly 1 out of 17. This seems
> terribly low to me, although I thought the ASP of $2.67 (something
> like that) might have been a little high.
>
> If 50% are paid, and the average price is $1 (there are a lot of
> under $0.99 out there) then ASP for ALL downloads would be $0.50.
> This would be a total of $500 Million in 10 months. If only one in
> four downloads is paid this is still $250 million in 10 months. Assuming
> that the rate of purchases is accelerating with more customers, I
> think it could easily be a $1 B / annum revenue center. That is roughly
> $1 per share. I really do not think this is pie in the sky.
>
> Final thought, I think if you had told Steve Jobs that they would
> be downloading 1 B apps in the first 10 months, he would have thought
> you crazy. App store success has wildly exceeded the expectations
> of everyone. (seekingalpha.com/symbo...)
>

2009 May 15 02:46 PM

[Cho Cha]

"Remember, the App Store is still not ever a year old, and for much of that time, the number of iPhones and iPod touches in the market was nowhere near what it is even today."

What's wrong with this sentence?

2009 May 16 01:44 AM