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Monetizing the App Store

Rohit Dadwal
22nd Sep 2011
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Moible Apps

Making money from apps is the next challenge in the mobile spaceBy Rohit Dadwal, Managing Director, Mobile Marketing Association Asia Pacific Limited

Applications are the next big thing in the world of mobile. Small, agile programs that add to the functionality of mobile phone and other mobile devices like tablets, these applications, or apps for short, are letting individuals do more, and more easily than ever before. Much of the increased functionality of mobile devices, including greater connectivity, data transfer and rich media content streamed over the mobile Internet comes from apps.

Apps are quite unique in that they allow mobile phone manufacturers to create devices with a baseline level of utility, include a certain number of basic apps, and then leave the rest of the device to the users. Users can select apps for themselves, according to how they themselves intend to use their devices, offering an unprecedented level of personalization and customization.

The main innovation with apps, aside from their existence, is how they are being marketed to consumers. Pioneered by Apple, all the major operating systems have their own stores – Apple’s is called the App Store, Google has the Android Market, Nokia has its Ovi Store, and so on. These stores act as central repositories for apps, letting users purchase apps regardless of the telcos who provide their data and voice connections. This, naturally, is problematic – the app store economy is a complex one that cuts telcos and device manufacturers away from the possible revenue stream. Telcos still benefit, of course, since increased online activity translates into a higher demand for data bandwidth – which can also be problematic, since competition between telcos is simultaneously driving the cost of data down. The app store operators have also gotten different policies about the content of their stores, which speaks to the potential for monetization through apps.

Apple, for example, has a firm grip on the iTune App Store – no apps appear without going through Apple’s approval process, and apps must also adhere to Apple’s terms and conditions. Most recently, Apple has caused some controversy by insisting that magazine and newspaper apps only include the ability to subscribe through the app itself, at a rate that must be identical to subscriptions by other means, for which Apple must receive its standard 30% fee.

This policy also extends to the purchase of ebooks, which crippled companies such as Kobo and Amazon, whose reader apps included the ability to purchase ebooks from within the app. Having to give Apple 30% of each ebook price, above and beyond whatever part of the ebook cost that the companies were going to get. Apple’s insistence that offerings through the store should be priced the same as elsewhere effectively prevented the ebook distributors from creating special pricing that would take care of the additional cost of offering books through their apps, and eventually the apps were updated with the purchasing functionality taken out.

The problem, essentially, is how to make money from apps, given the low cost and consumer resistance towards high pricing. Most apps are priced below US$10, with the majority being priced far below that mark. There have been several approaches to app monetization. Some brands have created their own branded apps, offered free, that include catalogue/purchasing information and the possibility to buy product through the app itself. Other branded apps display advertisements for the brand itself, alongside some similar functionality, e.g. car ads displayed alongside a driving game that gives some of the “flavour” of driving a luxury vehicle.

Some of the burden of app monetization has been taken up with in-app advertising, small clickable banners that are displayed to users as they use apps, often subsidizing the cost of the app itself so that the app can be used for free. Some apps are offered through the freemium model, where the initial app includes ads but costs nothing, but a more expensive version exists without the advertisements, or where a game is free to play but in-game enhancements (character costumes, new abilities, special weapons) can be purchased with real money.

All of these are partial solutions to the app monetization puzzle, and only time will tell which one will work the best for consumers. For the moment, app developers and publishers are functioning largely through trial and error facing great uncertainty as to how to make money off the apps they have so lovingly created.

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