The App Monetization Myth

7th Aug 2012
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Apple and Android have brought Apps into the mainstream, with everyone from techie early adopters to grandmothers using apps on a regular basis. This democratization of apps has been great for consumers, but I'm not so sure it has been so great for app developer's pockets. Getting users for your app is one thing, but monetizing that app is quite another.

How much does an app make?

Reliable numbers are hard to come by, but based on the latest data and estimates, Google has paid out $340 million to developers since the inception of the Android app store. Averaging that out over the 500k or so apps that are present on the play store, the average app can expect to make $680 over its lifetime. Of course, the marketplace is very skewed, and taking a straight average doesn't make sense. Lets try to split up that $340 million and see how much an average app on the store can expect to make.

The top 25 apps seem to have collected most of the $340 million that was paid out. For example, Disney's "Where's my Water?" game alone has between 1 and 5 million downloads ($0.99 per download), so roughly, Disney has made $2 million on that app. Similarly, the "Cut the Rope" series of games have made roughly $5 million across all their versions. Based on what your assumptions are, the top 25 app developers have made nearly $100 million of the money that Google has paid out, which leaves a measly $480 or INR 26,000 per app on average. These are very optimistic numbers, since we're only excluding the top 25 developers. If you exclude the top 100 developers, the average app can expect to make something in the range of $100 or INR 5,500.

The numbers on Apple are a bit harder to come by, but I doubt they are much better. Apple claims to have paid out some $5 billion since the start of the app store, and most of that has again gone to the top developers. Angry Birds and Temple Run have 100 million downloads each, and between them must have collected some $50 million. The top 100 apps at the iOS store have the lion's share of that of downloads, and therefore revenue. GigaOm estimates that the average iOS paid app has made $1,000 at best. More likely, your average new app will make a quarter of that, which brings us to INR 12,000 per iOS app on average.

What about Advertising?

The in-game advertising numbers are even more dismal. eCPM, or estimated revenue per 1000 ad impressions, on smartphones is in the range of $0.20 to $0.50 for apps. Some apps can go up to $1 to $1.50 for eCPM, but that's more of an exception. Another problem with mobile advertising is that the fill rates are very low - That is, ad networks are able to fill only 50% - 70% of ad requests because the supply of apps far exceeds the advertising demand. Crunching these numbers together, for every 1000 users that launch your app and use it for 5 minutes every day, you can expect to make $0.60 - $1.00 on average. So, over the month, you'll make a grand total of $24 from advertising, assuming you can get 1000 users to use your app daily.

Once again, the only developers making real money from app advertising are the top developers - the apps that have millions of active users.

So, How can I be a top developer?

The bad news is that breaking into the top 25 lists is going to be hard. It was always hard, but it is going to get even harder, because the existing top developers now have several tools to keep their apps in the top 25 lists.

One example of these tools is what's called a "burst campaign". Basically, app developers pay ad networks anywhere between $1 to $2.5 for every download of the app that they can drive. They then budget $1 million - $5 million over just one weekend, and run a concentrated campaign to drive app downloads. The sudden surge of downloads raises an app's rankings in the store, driving it up into the top 25 lists on the app store. And once an app gets into the top 25, it gets more organic downloads, resulting in an even higher ranking, creating a virtuous cycle that keeps the app in the top lists for several weeks.

Rovio demonstrated this technique very well when it launched "Amazing Alex", a new physics-based puzzle game. It became the top paid app on the iOS store in just one day, adequately demonstrating Rovio's power to market its own games. The other top developers - Zynga, EA, Disney etc... also have great marketing budgets which all but assures their new apps top spots. The production costs of apps are going up, and so are the marketing budgets, which means more is at stake for the big developers when they launch new apps. And in order to ensure the success of these big-investment apps, even more marketing budgets are allocated. The industry is slowly but surely moving to the hollywood-movie model, where marketing budgets are gigantic, often rivaling the cost of production itself.

Is it Game Over for Apps?

Monetizing apps was always hard, and it is going to get harder. Fewer and fewer amateur developers are going to stumble upon big hits, and the market is slowly going to turn more professional, just like what happened to the desktop software market in the 1990s. All is not lost, however. I believe there is still a small window for success open to app developers that are brave and are willing to experiment with newer and more innovative app monetization techniques. Newer platforms like Amazon's Kindle and Windows 8 are still unconquered, which is a great opportunity for app developers. Another area is newer monetization techniques like pay-per-level in games, or try-before-you-buy that are as yet untested, but may prove to be more effective at monetizing apps.

I'm sure as app developers you've made these calculations and estimates. What do your numbers say?

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