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The app store by Apple (NASDAQ:AAPL) has been immensely successful since its launch on July 10, 2008 and has been the subject of countless media articles like this December 2009 New York Times article gushing about how it has helped certain developers become millionaires overnight. One billion apps were downloaded from the app store by April 23, 2009 and it was just 5 months later that Apple announced on September 28, 2009 that downloads had topped more than 2 billion. It took the app store just over 3 months to hit 3 billion downlo ads by January 5, 2010.

Everyone from mom and pop development shops to current SINLetter portfolio holding Activision Blizzard (NASDAQ:ATVI) want in on this gold rush. Just like the California Gold Rush in the mid nineteenth century, it is often the people selling the tools that may end up becoming rich after the easy gold had been mined by early arrivals. This article is about those developers and companies that have tried to capture some of the app store magic only to find their apps disappear in a vast ocean of more than 160,000 apps.

One of the first iPhone games we reviewed on our sister site AppStruck shortly after its launch in May 2009 was a game with stunning graphics called Glyder published by a company called Glu Mobile (NASDAQ:GLUU) that is listed on the Nasdaq stock exchange. There are just a handful of public game companies and when I found Glu, I decided to kick its tires to see if it was an investment worth considering especially given its focus on building games for the iPhone and the iPod touch. But before we get into the specifics of Glu, I figured i t might be a good idea to get a reading on the market size.

Size of the App Store Ecosystem:

One of the first things a venture capitalist wants to know when you enter a room with your business plan is the size of the market and what portion of that market you expect to capture. The perception of the sheer size of the App Store ecosystem is one of the reasons start-ups like ngmoco have managed to raise $40 million from venture capital funds over the last two years. In stark contrast, Glu, which targets the exact same market, has a market cap of just $25.7 million.

The size of the App Store ecosystem has been a subject of lot of discussion and probably even Apple does not have the answer to it because the ecosystem not only includes the sales of apps through the App Store but also in app purchases of virtual goods and advertising revenue. Mining through the database of apps we built on AppStruck, I found that over 24% of the nearly 160,000 apps in the app store were free and 42% of them were priced at $0.99. Given below is the price distribution for 95% of the apps in the app store.

While having lunch in San Francisco with Jeff Scott, the founder of the leading iPhone app review site 148Apps.com and the Best App Ever Awards, we started discussing the size of the app store and he told me that roughly 70% of the people who land on his website are looking for free apps. GIGaom pegs the number of free downloads to 75% of all downloads based on data obtained by mobile analytics firm Flurry. Using the more conservative 75% number and assuming that downloads for the year 2010 are likely to hit 6 billion, it means that 1.5 billion downloads are for paid apps.

Based on the price distribution from the AppStruck app database, the weighted average price works out to $2.41 per app. The number should probably be lower because more 99 cent apps are likely to be downloaded than apps priced at $99.99. Taking a conservative approach, I am going to put the average price at $2. This means that the Apple app store is likely to generate $3 billion in revenue in 2010 on the low end and $3.61 billion on the high end of the range. Since developers get paid 70% of revenue, we have a potential market size of $2.1 to $2.53 billion available for developers.

AdMob, a mobile advertising company acquired by Google last November for $750 million, was approaching $100 million in gross revenue from advertising. Once you add revenue generated from virtual goods and advertising, the app store ecosystem could begin to approach $3 billion.

Part 2 of this blog entry will cover some of the challenges and opportunities that Glu Mobile faces in this rapidly evolving app store ecosystem.

Source: The Apple App Store Ecosystem and Glu Mobile (Part 1)