A New Year, A New Perspective: Web Economics in an App World

January starts my 14th year running Infinity Softworks and being in the mobile space. I have seen this market change drastically in those years, from a market dominated by Palm to a market dictated by Microsoft, from handheld computers to smartphones, from Nokia and BlackBerry to Apple and Google. And, from my perspective, the most important change: from software to apps.

I have struggled with these changes the last few years. The methods to market an app have changed drastically with the introduction of app stores. The levers of marketing — place, product, price and promotion — have been reduced by one, eliminating a lot of control we used to have as developers, and the extreme focus of finding all apps in the same place forces a decrease in price. (Amazing how a speech I gave two years ago is still applicable. I just didn’t realize how much.)

powerOne calculator for Palm OS and Windows Mobile ran anywhere from $60 to $160. Now our attempts to raise the price to $10 fails. $4.99, it turns out, is the optimal price. As Fred Wilson pointed out, the economics of mobile are trending toward web economics where alternative licensing models are the norm: micro-purchases, subscriptions, freemium, ad-supported. No surprise that the revenue generated from in app purchases (micro-purchases) is about to pass licensed software revenues.

But while the economics of mobile may be converging with the web, I am increasingly convinced that distribution will not. In other words, I don’t believe that the default way for consumers to use apps in the mobile space will be via a web site; instead, the average consumer will always prefer to download apps. (This is not to say we won’t use the web technologies of JavaScript, HTML and CSS to write them.)

Horace Dediu lays out this argument beautifully, although I don’t think he thought of it the way I am, in his recent article on the mistake of making strategic decisions based on technology:

Google should be asking itself if mobile computing will allow browsing to remain the predominant interface for internet consumption. If, as I suspect, it won’t then no amount of browser tweaking will help. The browser is already infrastructural. It can’t be the object of strategic focus.

To get an idea of how this would work consider Flipboard. Flipboard turns the entire browsing paradigm inside-out. Instead of consuming social media inside a browser, the app presents it in a more natural magazine-like format.

The browser is infrastructure: it is the technology we use when we don’t have an app to use. At least for the average consumer (not most of us technologists who will read this article) it is far more comfortable to run an app then open a browser, type in a url and use a web site. The browser  — or more specifically the web — is infrastructure. It acts as a protocol that lets us keep currency rates up-to-date or connects us to news or enables sharing with friends.

And that leads me back to powerOne. In the past three years of developing powerOne first for BlackBerry and then iOS it has become clear to me that that product and that business model are not sustainable. powerOne is a “heavy” application, extremely complex in development and advancement. While it goes far beyond what other calculators do in the iOS App Store, the app store dynamic makes it nearly impossible to differentiate from the other 5,000 calculators there. The complexity of the app means it takes six to nine months to port to a new platform, taking away this small company’s nimbleness.

There is another, much more dangerous problem with powerOne. We built our market in the old days with partnerships and affiliate relationships. We bundled with Palm, Sony, Garmin and other hardware vendors. We did affiliate deals with leading companies in real estate and education. We partnered with leading marketers in the space to promote our solutions. These models — where us and the partner make money on every transaction — are gone because of the diminished flexibility of app stores. We are restricted to the models that make sense in those environments and affiliate deals are not currently implemented.

So it has become clear to me that my thinking needs to change. It is critical to think about apps as connected entities to the world at large. It is critical to think about apps as “light-weight” and extremely portable so we can remain nimble and take advantage of the shifting market dynamics and the fact that our customers are often using three or four different computing devices. And most of all it is critical to think about how to market in a world where all purchase decisions are compressed into 2000 character descriptions and a few pictures. I have to think about the web economics and how they affect our business.

The business has changed, web economics are taking over, and how we market and build products needs to adjust, fast.

11 thoughts on “A New Year, A New Perspective: Web Economics in an App World

  1. I don’t think the app world should be regarded as a uniform entity: in Mac’s software story there has been a trend toward low prices (and this has given way to the Apps market) but also there is still a place for heavy software-like Office or Photoshop. And the same I think could be the way in the apps world: and in my opinion Powerone graph (I mean the complete app, the Palm one) has the same role as Office or Photoshop: it’s an app with a lot of functionality, and if you cut it best parts, it will just look like any other calculator. You have to mark the difference, by some way or other (remember when in Palm days the education community spread the word?).
    If you go the light way you loose the difference, and you’re lost. (Remember Apple before the return of Jobs?)

    • We have started testing that as we have Scientific and Construction variants in the app store already. It does help a little as they use a different set of keywords and categories to help us be found in more places. There is so much noise, though! Over 1% of all iOS App Store apps are calculators!

  2. It seems to me that the business model that fits apps best is the publishing industry, although they still struggle to figure it out there — especially since Apple has frustrated their attempts to allow subscriptions on the iPad. (See article in todays NYT.)

    You could try “seasonal” calculators, with price-of-gift for Christmas, and fright-effect calculation for Halloween. That would fit a publishing model.

    In the longer term, I do think that as WebKit starts to give better support to HTML5 we’ll see more possibilities there — of course not until there’s a larger install base. I predict hybrid apps which have native WebViews and use HTML5 will start to predominate as they can be migrated across multiple mobile platforms easier than the setpiece battles of individual native apps.

    Freemium can work, but only if you have some content on the web people will pay for. Utility software is inherently limited and temporary as operating systems always grow and encompass that functionality.

    John R.

  3. Thanks for the blog post Elia, always enjoy the thoughtful writings you have. I agree its a different world than the old Palm days in many ways. Where I feel differently from most is that I don’t really care about the hundreds of thousands of other apps out there, or the analyses that say “the average developer cant make a living” on app store sales. My stance is that if I am going to play in this market, I not shooting to be average, I am in it to win it. How to “win” in the market is of course always going to be a big challenge and marketing and business development strategies as well as product strategy are big parts of that. I believe there is money to be made on the app store, and if there is, I am going to try my best to be one of those that make it. I guess I’m hopelessly optimistic that way 😉

  4. Elia, what I see is that the landscape has changed but there are still many options. In the case of Apple, which is the only “App” store I’m selling on at the moment, it’s true that there is only one Point of Purchase. Apple is the retailer, and they take their 30-40% commission on sales. They’ve also destroyed any pricing friction we may have enjoyed in the past — an app has one and only one price, no matter the purchaser. No more channel-based pricing models.

    Many app publishers have allowed the App Store to also be their sole marketing channel. It’s the default unless you go out and market yourself. But you still CAN go out and market yourself. You can get reviews, features, and advertorials in industry publications. You can work with bloggers to get coverage. I know with WeetWoo! we’ve seen a pretty even split on purchases between in-Store discovery and blog reviews. (Of course, neither of those numbers comes anywhere close to being on the iTunes Store home page, which happened once, but I’d imagine being featured on Oprah would give you a similar effect.)

    Similarly, it’s still quite possible to implement affiliate or channel partner rev-share. You might have to integrate with an affiliate network to get auditable conversion numbers, but it would be very easy to have a partner direct purchasers through a redirect to the app store and reconcile that traffic against purchases.

    The down side to any of these non-App Store methodologies is that they cost money. With ASPs of $4.99 and paying a 30% commission it’s hard to come up with the money for any marketing much less splitting the proceeds with a channel partner. So you have to raise the price to something reasonable. And that means in-Store discovery is going to tank because, as you say, it’s just too hard to differentiate. But really, no one is going to buy a $160 piece of software without knowing it’s worthwhile, so you’re back to needing those channel partners and industry writeups anyway.

    In the end I think it comes down to choosing your market — either you pursue the mass market with a very inexpensive product and rely on low-cost marketing or you pursue a much smaller professional market where you can make real money on each unit sold. There’s nothing to prevent you from doing the latter, you just have to accept that in doing so you’re giving up on the former.

  5. Just a quick note: I used to be of the belief that nothing could touch native device apps. I’m no longer believing that.

    I’ve seen the birth and the fall of J2ME, WAP, and now HTML5. If I were to guess what the world would look like in 5 years I would say native apps as they are today will start to decline. I haven’t played with webOS, but heard they support native HTML/JS apps. And so does Symbian and MeeGo (running inside what Nokia calls browser-less browser).

    I can imagine the future will be web based with option for store the web app on your device for “native” runtime.

    I suspect browser will be the predominant way to interface with apps and think Google is on the right track.

    As an example: I wrote a native smart client for Symbian devices in one night using HTML/JS. This smart client could receive new code (expand its feature set and look & feel (UI) from our web site without bothering the user with upgrade requests). The same client for Android has gone thru 3 developers, shit-load of money, and if we want a new feature in we have to contract with yet another Android developer.

    Last note: Web apps of the future don’t need a URL to be typed in. In fact, web apps of today don’t need that either. You can just add a short cut on your home screen (Android and Symbian at least). They should allow the web app to add the short cut for the user, but URL is not required at the end of the day to keep running a web app.

    And web apps are cheaper than native apps 🙂 If money is the driver, then guessing the winner should be simple 🙂

  6. All I can say Elia is as a financial planner I would happily pay alot more than $5 for powerone if available for my HTC Android phone.
    Steve Kadwell

  7. I think I paid $65 years ago for the copy that I’m still running on my Centro. I would like to go Android, but if I need to replace my phone, I would be tempted to jump ship to iPhone or BlackBerry solely because of the lack of PowerOne’s non-availability.

    Like Steve said, I would happily pay more than $5 for PowerOne.

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