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Has the app economy peaked?

The explosion of apps–be they games, content or productivity enhancers–has been one of the biggest drivers of the success of the smartphone. But paying for apps is now starting to decline. If this can’t be reversed, then publishers may need to rethink their business models–just as they’re starting to get a handle on digital distribution.

Smartphone penetration is now over 50 percent of the US population and is still increasing rapidly. Tablet penetration is doubling every year, and stands at about 33 percent currently. The more people use smartphones, the more apps they use. In fact, the average person’s number of actively used apps has tripled over the last four years from about 7 to about 23. This should be all good news for app creators – be they the kids in their bedrooms hoping to strike it rich, or the large developers.

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However, while usage rises, we see a peak in the level of spending on mobile apps. For a long time, it has seemed that consumers have been willing to pay a dollar or two for games, apps and even for content and media – despite worries about pirating and freemium models from publishers. But across all categories, the average annual spend on apps dropped in 2012. For example, average spend on digital reader newspaper subscriptions fell by $1, while online newspaper subs fell by a startling $7 to below their 2009 level.

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What’s behind this drop? It seems that as smartphones become a mainstream device, the latest wave of users are both less willing and, in some cases, less able to pay for apps than the existing customer base.

From a developer’s or publisher’s perspective, the impact of lower demand for paid apps is offset by the rapid growth in total volume of users. However, the shift points to a broader challenge. As new mobile services come online, multi-faceted business models will be required to improve economics. One-off fees, subscriptions, advertising and other bundled models (eg, content embedded in hardware or combined with non-digital products) will all have to be part of the revenue mix.

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In addition, we’re seeing differences in monetization and reach of different platforms that give some pause to where to focus development resources. When it comes to the US mobile market, for example, more Android apps are in use (46 percent ) than Apple apps (42 percent). When it comes to spend and profits, however, the tables are turned, with Apple winning 51 percent of the market to Android’s 36 percent. Apple users are more likely to pay for apps, spend more for them and use them more than their Android counterparts. We believe these economics will bolster Apple’s app ecosystem and push publishers to prioritize app development for Apple. Knowing how to balance near-term monetization of one platform with the broader reach of the other platform will create ongoing tensions, especially for international apps where Android far outpaces iOS.