Steve Jobs spun the app store as a means of driving sales of the iPhone and iPod touch. As we can only guesstimate how much Apple (AAPL) is making or can potentially make from the app store, so far it appears to be what Apple said it would be: not a huge revenue driver, rather a marketplace for innovation and entrepreneurial-ship: a place where ideas can brew in this nascent market, generate excitement and help Apple find ways to lead hardware into the future. At this stage of the game Apple can sit back and monitor the best apps and let the user themselves decide what functionality a pocket powerhouse or a tablet should really have. Of course, this is the strategy right now, but what about when the market matures? When the smart phone pie is falling into place and companies realize the true revenue streams are no longer from the hardware, but rather from the content?
We know from Apple that it is collecting 30% of the revenue generated to maintain the cost of the app store itself—how the company came up with the 30% number without any knowledge of how the app store will develop or how large it would be is beyond me. Yet the growth of the app store has probably been beyond even Steve Jobs' wildest expectations, and reaching 1.5 billion downloads with a 45 million user base is truly remarkable. But to put this into financial terms, I think there is too much of a focus on cost per app, etc… investors may be failing to see what Apple is creating here.
Instead of figuring out how much Apple makes off of each application—I suggest taking a different approach, one that I think is a better guideline for an iPhone’s worth. Let’s think in terms of how much revenue a user is worth to Apple. With the new operating system, consider the possibilities: movie downloads, ebook downloads, gaming and not to mention the already existing iTunes. In each of these content categories, Apple may be sharing multiple micropayments, even on free applications. The devices themselves enable the convergence of several industries. If Apple becomes a primary platform, if not the primary platform for media distribution, beyond news, music, television, radio, and video content, how much can Apple look to make each month per user? With every purchase of iPhone and iPod touch—when everything falls into place and a ridiculous number of corporations jump on board with their own iPhone apps as if fearful of losing their market leadership, be it through a third party service or not, the value of a customer is worth not only their upgrade to a new phone at a future date, but $20 a month in content revenue.
Alright, $20 is probably as arbitrary as Apple deciding it will cost 30% of app store revenue to run its site. But with these devices evolving into our wallets, our cameras, our video recorders, our television, yes our phones, our gaming devices and who knows what else… always connected, always in our pocket, backpack or wherever else depending on the devices we probably have yet to imagine. With all that convergence, I believe $20 in Apple's share of revenue per subscriber may possibly be on the conservative side. That would mean that all of the content providers combined can only get $60 a month out of an iPhone user in subscriptions fees.
But let’s do the math on this. Currently we have 45 million iPod touch and iPhone subscribers—at $20 per month, once the app store and the gold rush for market share among the app makers finally settles, this would translate into 900 million in revenue per month, or 2.7 billion per quarter. That’s with Apple’s existing user base. What about when the market reaches maturity? Currently there are roughly 4.1 billion cell phone users and growing. How soon before everyone has a smart phone? Let’s give Apple ten percent of the worldwide smart phone pie, which I would argue is evolving to be the only kind of cell phone pie. That would mean when the paradigm shift is complete and every phone is essentially a smart phone… with a mere 10% percent market share Apple would be drawing in 27 billion in revenue on content alone. Is this possible? How far are we from this possibility? The iPhone 3G now sells for $99 and a refurbished first generation iPhone for $49. How many years until the cost of an Apple iPhone is embedded in its subscription price completely?
I get the sense that something is beginning to happen at Apple at a quickening pace. Over the next six months, the new operating system will begin to drive app store revenues per user higher and higher. Though the average selling price may drop even further (because content providers are now inclined to sell apps as software apparatuses to enable content delivery paid month to month), the amount paid by users should be on the rise. In these terms, Apple is the gatekeeper, it has the power to decide which content gets blocked, as we witnessed with recently with Google (GOOG), and it also has the power to control pricing through the revised revenue sharing agreements we’ve seen with iTunes. The question should no longer be how many cents per app download; rather, how many dollars is each of those 45 million users worth?
Disclosure: Long on Apple.
