For Apple the app store is all about selling iPhones

By May 14, 2009Mobile

Jeremy Liew of Lightspeed has posted a an analysis which shows that Apple has made no more than $20-45m in revenue from the app store. I won’t repeat the calculation here but it is a fairly straightforward product of the number of downloads, the average selling price multiplied by Apple’s 30% cut.

This is a much lower figure than I would have guessed, and it pales into insignificance against Apple’s revenues from selling iPhones (of which they have sold 13m). So as Jeremy points out this means that for Apple the app store is important only because it makes the iPhone a more usable device. Kind of like iTunes for the iPod.

The relative unimportance of the app store goes some way to explaining why Apple treats its development partners so shabbily.

The iTunes analogy doesn’t bode well for iPhone developers either – most of Apple’s partners in the music world feel that they have gotten on the wrong end of the power equation and would do things differently the second time round, principally because they haven’t made enough money. It could turn out to be that way with app store developers too.

If Apple’s 30% cut is $20-45m then developers have made $40-90m in aggregate, which isn’t much when you spread it across the 30k or so apps that are now available from the app store, and it still isn’t that much when you take account of the fact that most of the apps are free.

iPhone app sales are, of course, growing very fast which makes the future a bit more palatable than the past, but the strong implication of this for me is that focusing 100% of the iPhone as a platform is a dangerous game.

  • Chris Morton

    Agreed – the iTunes precedent has made life tough for others selling mp3s as there is so little margin left; which is fine for Apple as they're all about the ipod sales.

    However I suspect the new payment platform on iPhone out this summer will start to change that dynamic.

  • The upside, for Apple, is that, apart from running the servers and developer support, sales there are 'free revenue', which will grow naturally and organically as more and more developers sign up, and more iPhones are sold. Effectively Apple just reaps the benefits of the growing ecosystem.

    Limited revenues on the AppStore are also affected by the trend towards ultra-cheap apps. Something that people reckon will not continue forever as it's simply not sustainable for the developers.

  • Thanks Chris

  • Surely what the app store is about is creating lock in. It's not really about Apple selling this generation of iphones, but about them selling the next 5 generations.

    Once people have spent a real amount of money on apps or invested time into them – this will be probably the biggest decider as to whether they buy the next iphone or jump ship to the latest Nokia phone. Once people have a collection of apps there will be considerable costs associated in moving platform – in exactly the same way there are significant costs for consumers or enterprises to move from Windows to Mac. I can already see myself buying the next iphone, even if the next Nokia is 'better' (which I think quite likely) because of software collection.

    Apple tried this with the Ipod (which is one of the reasons I am sure they were quite happy with the music companies forcing them to encrpyt tracks). The biggest threat to Apple's model here will be tools that make it easy to move apps from one platform to another, and prevent you having to re-license content. I expect Apple to fight anything that enables that very hard.

    In the future I am sure Apple will look to increase revenue generation from the App Store once $20+ applications start being developed. It will be interesting to see the success of the Slingbox app and whether other developers committ budgets to make higher value applications. Once they do, the revenues apple get could increase significantly.

    Cnet/Munster reported that Apple make $565 unit profit (before fixed costs) over a 2 year period per iphone. That equates to close to $24 a month, so would require $80/month in software sales alone to match – and that assumes the app store has no costs which is clearly not the case.

    So yes, it's about shipping hardware.

  • Surely what the app store is about is creating lock in. It's not really about Apple selling this generation of iphones, but about them selling the next 5 generations.

    Once people have spent a real amount of money on apps or invested time into them – this will be probably the biggest decider as to whether they buy the next iphone or jump ship to the latest Nokia phone. Once people have a collection of apps there will be considerable costs associated in moving platform – in exactly the same way there are significant costs for consumers or enterprises to move from Windows to Mac. I can already see myself buying the next iphone, even if the next Nokia is 'better' (which I think quite likely) because of software collection.

    Apple tried this with the Ipod (which is one of the reasons I am sure they were quite happy with the music companies forcing them to encrpyt tracks). The biggest threat to Apple's model here will be tools that make it easy to move apps from one platform to another, and prevent you having to re-license content. I expect Apple to fight anything that enables that very hard.

    In the future I am sure Apple will look to increase revenue generation from the App Store once $20+ applications start being developed. It will be interesting to see the success of the Slingbox app and whether other developers committ budgets to make higher value applications. Once they do, the revenues apple get could increase significantly.

    Cnet/Munster reported that Apple make $565 unit profit (before fixed costs) over a 2 year period per iphone. That equates to close to $24 a month, so would require $80/month in software sales alone to match – and that assumes the app store has no costs which is clearly not the case.

    So yes, it's about shipping hardware.

  • Thanks Chris. Great point about higher value apps. The lockin point depends on the lifetime of the apps, which I suspect is still pretty short.

  • Thanks Chris. Great point about higher value apps. The lockin point depends on the lifetime of the apps, which I suspect is still pretty short.

  • Will go together with the price off the apps I presume. This is why I expect Apple will put a lot of effort into encouraging more expensive apps with higher profile marketing through the App store – it's these apps in particular that will provide lock in.

    My bet is they have a few “launch titles” ready for to announce at the launch of the next iphone; probably ones that will be built around some of the hardware features. Games will probably drive it initially but productivity will come next.

    I still agree with your point though; the core value to Apple for even these higher cost apps will be selling hardware; while the revenue from the apps won't be insignificant it will still be relatively small compared to the hardware margins.

  • Surely what the app store is about is creating lock in. It's not really about Apple selling this generation of iphones, but about them selling the next 5 generations.

    Once people have spent a real amount of money on apps or invested time into them – this will be probably the biggest decider as to whether they buy the next iphone or jump ship to the latest Nokia phone. Once people have a collection of apps there will be considerable costs associated in moving platform – in exactly the same way there are significant costs for consumers or enterprises to move from Windows to Mac. I can already see myself buying the next iphone, even if the next Nokia is 'better' (which I think quite likely) because of software collection.

    Apple tried this with the Ipod (which is one of the reasons I am sure they were quite happy with the music companies forcing them to encrpyt tracks). The biggest threat to Apple's model here will be tools that make it easy to move apps from one platform to another, and prevent you having to re-license content. I expect Apple to fight anything that enables that very hard.

    In the future I am sure Apple will look to increase revenue generation from the App Store once $20+ applications start being developed. It will be interesting to see the success of the Slingbox app and whether other developers committ budgets to make higher value applications. Once they do, the revenues apple get could increase significantly.

    Cnet/Munster reported that Apple make $565 unit profit (before fixed costs) over a 2 year period per iphone. That equates to close to $24 a month, so would require $80/month in software sales alone to match – and that assumes the app store has no costs which is clearly not the case.

    So yes, it's about shipping hardware.

  • Thanks Chris. Great point about higher value apps. The lockin point depends on the lifetime of the apps, which I suspect is still pretty short.

  • Will go together with the price off the apps I presume. This is why I expect Apple will put a lot of effort into encouraging more expensive apps with higher profile marketing through the App store – it's these apps in particular that will provide lock in.

    My bet is they have a few “launch titles” ready for to announce at the launch of the next iphone; probably ones that will be built around some of the hardware features. Games will probably drive it initially but productivity will come next.

    I still agree with your point though; the core value to Apple for even these higher cost apps will be selling hardware; while the revenue from the apps won't be insignificant it will still be relatively small compared to the hardware margins.