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Is the App Store Gold-Rush Over?

08.01.2012, Business, Tech, by .

TL;DR? – Yes, yes it is.  But how about changing your business model?  Please read on.

I was reading this blog post over at the appcubby.com blog and thought it worth a little extra narration and argumentation.  The point of the article is to explain why the iOS email app Sparrow and their development team were recently “acquihired” by Google and essentially shut down.  The author uses his own experience with his iOS apps as well as some historical charting and statements made by the Sparrow team to perform a pretty good analysis determining why the team (and its investors) were willing to kill their baby in favor of punching a clock.

In a Nutshell

Sparrow was arguably a very successful app, both in the mac and iOS app stores.  But, due to the dynamics of these app stores, it is very difficult for a dev shop to sustain itself off of the very low one-time payments that are now the the expectation and the norm.  Gone are the days where a dev shop can build an app and sell it for $99, $199, or a $499 one time fee that the user will have to pay again in 2 – 3 years to get an update.  With the expectations set by the $0.99 prices in the original iOS app store, consumers have come to expect the software they purchase to be extremely cheap.  With the success of the first wave of indie developers in the original iOS store the expectations from developers has been, “if you build it, they will come” (and I’m gonna be rich!).  The dime-novel-esque stories of the iOS developer who makes $250K a month on his $1.99 utility have caused the supply of apps in the iOS store to exceed 650,000, while only the top few hundred are able to actually get any exposure to the public.  The convergence of this need to be in the top 100 and the rosy outlook by developers has kept significant downward pressure on prices.  Consumers are generally not going to pick the $49 app over the $4.99 app with a similar name but only one more star in the reviews.  This has also lead to the proliferation of 400,000 zombie iOS apps due to developers who have abandoned their now defunct applications that failed to adequately fill their bank accounts.

Why is this bad?

“So what, I like apps being $0.99.  I wish gas was that cheap.”  This might not seem all that tragic to you, but 400,000 zombie apps, and the fact that you need to remain in the top roughly 250 out of 650,000 in order to make a decent living (according to the aforementioned blog analysis), means that the market has not allocated resources efficiently and tens or even hundreds of millions of dev hours have been wasted and potential innovation has been lost.  Let me put the top 250 out of 650,000 in a little perspective.  A lot has been made in the last year about “the top 1%” and how rich you need to be to be in that top 1%.  It’s generally agreed upon that being in the top 1% of income earners is difficult to do.  Spot #250 on the app store means that you are in the 0.04th percentile.  As in 0.04% of apps have done better than you, and 99.96 have done worse.  This is a huge disincentive to developers.  Many developers, myself included, have abandoned the platform altogether as a viable means of making a living.  Why should I build my apps on this platform only to be put along side 650,000 others and need to remain in the top 0.04% in order to have a sustainable business?  The chances of success starting up a Subway are significantly higher than that.  Now that word has gotten out about just how difficult it is to succeed without already having a network of a few hundred thousand people eagerly awaiting news about your new app, the days of tens of thousands of new quality apps at your fingertips every month are over.

Developers are getting the hint that, it ain’t 1849 anymore. Not only that, but apps like sparrow are no longer being updated because the value prop is just not there.  Why stay splitting $30K a month among 5 team members when you can take a payout from Google AND have a $15K/month salary on to of it?  As time goes by, expect more of these acquihires and if you’re a consumer you can expect a less satisfying experience in the app store(s). At least until the pendulum swings back in the other direction and it once again makes sense to be an Indie app store developer again.

So what’s a dev to do?

The path toward success on the original app store was to just have an app.  Within a year that wasn’t good enough, now you needed to devote some resources to making sure that your app would pop within the first few days of its launch in order to make the charts, and then you would be successful.  Now its not about putting a little resources in, it’s about having massive resources at your disposal.  You need to drive thousands of user to the app store with the sole intention of buying your app, you need to price it low, and you need to have a good app.  But what about pricing it extremely low, as in free?  The new secret to app store success is to simply use the app store as a lead generation source.  Don’t depend on app store revenue, instead depend on revenue from some other thing that you’re selling, for example a subscription-based web app, and just use the app store to generate traffic and leads.  The recipe for software success that I see going forward is not revolving around getting 2,000,000 downloads for $0.99 a pop, but getting 20,000 subscribers who are willing to pay $9.99 a month for your service, or getting 2,000 who are willing to pay $99.  You need to take your prospects out of the “buying software” mindset and into the voluntarily choosing to pay for a service mindset.  Take spotify for example.  They have a free iOS app and a free android app.

But you can’t use them without having a subscription to their $9.99 a month service.  Spotify wouldn’t be able to exist as a $0.99 download when you consider their licensing fees, and no one would be willing to pay per-song for songs that they could only play in Spotify. Plus everyone who is willing to pay per song or album has already developed the habbit of just going to iTunes. But, turn their business into a reasonably prices service and you’ve struck gold.  Cable companies have known this for years, and they too would not be able to survive without subscription pricing (and a whole lot of ignorant learned behavior).  If I walked up to you and said “If you give me $1500, I’ll attach a cable to your house which will enable you to pay $500 in order to purchase a screen that will let me serve up advertisement in your home with a little programming mixed in around them” you’d look at me like I had 6 heads.  “Ohh and after 2 years is up, you need to give me $1500 again to keep allowing me to show you ads”.  But you take that same proposition and turn it into “Give me $60 a month and you’ll have access to amazing HD content (television sold separately)” and you have a winner.

So, the gold rush is over when it comes to making millions in the app store by just building something useful and letting it fly on its own.  But, that doesn’t mean that us developers need to keep buying into the hype and giving away tremendous value for very little reward.  Re-frame your next business idea in terms of delivering a service that brings in recurring revenue and you can realize the success that you thought your little iOS taking app was going to bring you.

Update: I threw this over on hacker news if anyone wants to discuss this with some hackers.  Though (shameless plug) you’ll probably need to upvote if you actually want discussion  🙂