Will Mobile App Pricing Fall to Zero?

Much has been made of the success of the Apple (AAPL) iTunes App store. In just 2+ short years since the iPhone has been released in June 2007, more than 100,000 iPhone/iPod Touch apps have been written and released by the iTunes store.

This success has been attributed to many things: the sexiness of the device, entrepreneurial fever and the clever programming features of the iPhone (the iPhone senses how you move the device in your hand and can change the orientation of the screen based on how you hold it).

I would submit that there was a much simpler explanation for the success of iTunes Apps: you can make money selling software again. When was the last time you saw a successful, new, innovative piece of software you had to pay for on the Wintel or Mac platforms? When was the last time you paid to use a piece of software on the Web? The inexorable trend toward web pricing removed all the volume platforms (Wintel, Mac, Web) as profitable software platforms for developers with new ideas.

Web pricing is good if you’re a consumer and bad if you’re a software developer. Web pricing dictates that you can’t charge for the software itself. To make money in software now on the Web you have to offer the software for free and make money by advertising or selling add on’s. Did Facebook charge you to post your latest tidbits on your Wall to your family and friends? Not a chance.

Lee Gomes in the Nov. 16 Forbes stated the definition of Web Pricing very directly:

“…. given the manner in which the Internet (the Web) is training most of the world to never pay for anything digital, be it music, newspaper stories, or software.“

Some of us remember when you used to have to pay over $400 for a word processor with copy protection. Microsoft (MSFT), one of the world’s most powerful companies, now gets slightly over $100 for MS Office. In the 1990s, all the software in MS Office would have sold for over $1,000 dollars. The freeware/shareware movement has built and distributed database management systems (MySql), browsers (Mozilla ) and communications software (WS FTP) at zero cost to the buyer. In the past, only major corporations with large development staffs would write this kind of software, and they expected to be paid for it.

So along came the iTunes Apps store, which allowed software developers to charge for their creations. It is an attractive business model for developers who are successful at it. Apple sells the applications and pays the developer 70% of the proceeds -- you don’t even have to worry about Accounts Receivable. On the surface, Apple gives software developers a lot of leeway on pricing, and reversion to web pricing seems a long way off. A person with a musical bent wishing to sell a song on iTunes can only charge 99 cents or $1.29. Software developers are allowed to charge anything from 0 (free) to $999 per download.

Gizmodo’s John Herrman suggests that things may not be as rosy as first appears for iPhone App developers in this article. He argues that there is pressure for iPhone apps to be cheap, even if they provide extensive user value (the App replaces a $200 Garmin) and are priced higher on other platforms.

Ask yourself whether an iPhone app is really all that different from a Web app. The programming involved in an iPhone app is quite different than the programming for a Web app. That said, I would argue that half or more of the apps for sale on the App Store could be programmed as Web apps. The developers deliberately chose not to write a Web app, even though it would run on more platforms, because they wanted to charge for their application.

From an investment standpoint, there are big players involved in the mobile app space -- Apple, with it’s partner AT&T (T), and Verizon (VZ) and Google (GOOG) with their new Droid offering and its Android-based App store. Some in the tech blogsphere claim Apple is pushing for lower App pricing but forget that Apple loses its 30% cut if it drives all apps to be free apps.

So the investment takeaway here is that Apps are not currently a profit center for the major players, and with Web pricing on the horizon, may not be profit centers in the future. But with Apps known to affect customer loyalty and non-technical corporations (Starbucks (SBUX), Barnes and Noble (BKS), and Target (TGT)) striving to have an“App Strategy,” the winner of the App war standard may have as much influence going forward as Microsoft did when it established it’s operating system standard for Wintel PC’s. Microsoft’s efforts in the mobile operating system space have not had nearly the success of their Wintel PC offerings. This may explain the lack of an App offering with significant market share by Microsoft or one of it’s mobile/phone O.S. partners.

Disclosure: The author has recently published an App on the iTunes store and is dealing with the vicissitudes of iTunes pricing and customer expectations around App pricing. The author is long VZ, T and MSFT.

Comments

[Apple Diner]

The model this week: "Freemium". This means that the basic app is free, with premium content available at a price. It makes sense and Apple has adjusted their App Store to include this model. As far as Droid goes... don't expect much. They'll end up owning about as much market share as Palm.

2009 Nov 13 01:45 PM

[Apple Diner]

Your post has absolutely NOTHING to do with the article posted. Quit spamming.


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2009 Nov 13 01:46 PM

[jack dee]

>>>>one of the world’s most powerful companies, now gets slightly over $100 for MS Office. In the 1990s, all the software in MS Office would have sold for over $1,000 dollars. <<<<


That is complete utter trash, made up junk.

In the mid 90s MSFT charged far far less than $1,000 for office, did you just pull that number out of your hat or what..


In 1994-1995 MSFT took in a little less than 5 billion, and sold over 7 million copies of office alone. even if you assumed that MSFT sold nothing but office, not a single other product $1,000 per copy would exceed totel rev by billions.
SO please dont make up trash to support your story.

and as to MSFT getting $100 for office, please wake up and compare Corp seat to corps seats not some bs student ed to corp seats.

rant over..

2009 Nov 13 02:21 PM

[Thomas J. Gordon]

Jack Dee, I remember very specifically Word Star, Word Perfect, Lotus 123 being sold for over $400 and the media they were sold on being copy protected. I view ms office as word processing (word) plus spreadsheet (excel) and powerpoint (didn't exist in the early days but is valuable). Home and Student Office Upgrade which contains these items can be bought by anyone, not just students, for slightly over $100. I stand by my statement and those were 1990 dollars which are worth more than 2009 dollars.

2009 Nov 13 03:07 PM

[Thomas J. Gordon]

Jack Dee, My apologies. The pricing I mention was from the 80's not the 90's. My point still stands and 1980's dollars are woth a hole lot more than 2009 dollars.

2009 Nov 13 03:10 PM

[jack dee]

Ah I see Thomas , you changing what you said and pretending to be right

I quote you
"""In the 1990s, all the software in MS Office would have sold for over $1,000 dollars. """"


Fact in the 1990s all the software in Office sold for far far less than $1000 adjusted or non adjusted dollars.
And in the 1990s MS Office had just what you are talking about.

.

Please if you are going to write something dont make things up and then later try to pretend you meant something else. Your intent was clear and clearly incorrect.

2009 Nov 13 04:22 PM

[sheldon1]

The notion that your cannot sell product / software for fee on the web is narrowmided. To think you have to give it away so that you can charge advertising is going to change. Software, newpapers, movies, games, and other items of interest will be sold and they will be sold creatively. Unless you sell them... there is little incentive to develop product. Look to the future people are so fed up on the advertising revenue approach and people will accept to buying of product at reasonable test first then buy concepts.

2009 Nov 13 08:54 PM

[Thomas J. Gordon]

Sheldon1, I hope you're right and I think some people are able to charge for content now (wsj premium, barrons, ?). I'm tired of advertising. I think a good micro payments system would help the cause of those who want to "pay for what they value and value what they pay for". I think one of the reasons iTunes works for payment is most people keep a balance and can buy whenever they want without pulling out a credit card or typing in their paypal id.

2009 Nov 13 09:01 PM

[a4ism]

Your idea of Freemium, as explained in Chris Anderson's book, is mis-applied in this case.
www.amazon.com/Free-Fu...

Yes, some of the free apps are 'adware' or 'crippleware'. But TJ Gordon's point was not addressing the items marked as "free". He was stating (inaccurately) that the Free Market doesn't work in this venue for setting prices.

There are Apps in the AppStore that cost $2 or $3. People are buying these apps. This is true for the iPhone, and this is true for the Droid. I know for a fact that there are active user communities of both, because I know many users who develop for both sides, and I know many users who buy the apps as well.

There is a general belief, within the scientific community, that it doesn't matter how low the price goes under $10. It does matter, but nobody has ever done a research paper on whether people are willing to pay $2 or $4 or $12 for an app. Some people will pay $2, but not $4. The AppStore proves this out, and cash flows are proving that those $2 apps can generate enough revenue to pay the developers' salaries.

Let's get to the root of this article:
>> Web pricing is good if you’re a consumer and bad if you’re a software developer.
and
>> Disclosure: The author has recently published an App on the iTunes store and is dealing with the vicissitudes of iTunes pricing and customer expectations around App pricing. The author is long VZ, T and MSFT.

I think these two statements really sums it up. The author of this article is unhappy that his app isn't selling well enough, and is therefore saying that the system doesn't work. I disagree with this premise, the reasoning, and the conclusion, but you are all entitled to your own opinions. Meanwhile, I will be downloading apps for the Droid and the iPhone -- but not necessarily yours...


On Nov 13 01:45 PM Apple Diner wrote:

> The model this week: "Freemium". This means that the basic app is
> free, with premium content available at a price. It makes sense and
> Apple has adjusted their App Store to include this model. As far
> as Droid goes... don't expect much. They'll end up owning about as
> much market share as Palm.

2009 Nov 14 09:55 AM

[brewer]

iTunes is the clear leader in micropayments. Have you even use iTunes?? You never have to use a credit card after the first time. Paypal isn't even an option.

You are going to. See a whole lot more affordable content on iTunes, books, newspapers and magazines most likely.

Apps can bill you iTunes account. In a year or so, you might use your iPod or iPhone as a wallet for small purchases, things for which you'd rather not use plastic.

2009 Nov 14 10:05 AM

[Thomas J. Gordon]

a4ism, I'm not saying the system doesn't work. I'm saying there's tremendous downward pressure on software prices on all delivery platforms and asking if iTunes apps are next. Economics states that pricing moves towards MC = MR (Marginal Cost = Marginal Revenue) and the marginal cost of producing another unit of software is very low, so that's not a surprising result. You bring up an interesting point that there are smaller ecosystems of interested buyers and willing developers and they may a healthy ongoing phenomenon on the iTunes store. I don't particularly have any visibility into those ecosystems and in my mind the only people who have visibility into that are successful developers in that space and Apple.

2009 Nov 14 10:08 AM

[mollytjm]

no one who can afford a smartphone (and plan) thinks anything of spending 99 cents for an app. why should they all be free when people are willing to pay something for them? the free apps are mainly to drive business to something else or in the public domain anyway (like classic books) or to start an app developers reputation.

100,000 apps on the iPhone make it a part of you because the apps cover every information source possible, almost any media you want, including books and videos, most major games, music, directions, web surfing and constant connection to your family and friends via a zillion ways. no one with an iPhone bought it because they just wanted a phone.

so those with the iPhone and apps already installed aren't going to hesitate to download more...they don't need to be free. and free often isn't anyway if you don't like ads.

i do agree that software products are cheaper now, but then so are computers. our first computer was $3500, in 1983...and had NO internal hard drive. production volume does count. but virus protection for a PC is still expensive and iffy. It's always been interesting to me that a company can get away with selling a computer with an OS that is so hackable a 10 year old can break in and then expect the buyer to constantly pay to protect it.

Microsoft was cost industry every bit of profit it (Microsoft) has made in the form of lost employee time, huge IT departments, lost data and stolen hard drive info. I always laugh when i see articles that say Macs are expensive. They might cost a bit more to buy..but they sure don't cost more to keep.

I think Apple knew what it was doing with the iTunes store and then the App Store and they know how to run a profitable business. We'll keep seeing 99 cent apps.

2009 Nov 14 10:36 AM

[Thomas J. Gordon]

For developers trying to get a sense of their probability of financial success on the store and as a response to Commenter’s above who claim that all is peachy keen for good iPhone App developers I wanted to direct your attention to this article that I found today.

www.stromcode.com/2009.../

Mr. Strom(?) is a successful iPhone App developer (2 apps in the top 50, one of them in the Social Networking category) and talks about the effect of 99 cent pricing on him and some other surprising statistics. My personal experience with pricing my App at more that 99 cents is pretty good, but that may be because my customer base are well heeled, Seeking Alpha, type investors. But for those of you who are interested in the business side of iPhone App development, I would say the above URL is a must read.

2009 Dec 03 10:51 PM