When Everything Else Is Gone, All I Have Left Is Passion

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Brad Feld, describing his first interactions with two guys in the incubator TechStars as an example of passion in a start-up founder:

At that moment, Sphero was born. And I knew that if Adam and Ian could make any progress over the next 10 weeks creating a robotic ball controlled by a smartphone, I wanted to invest in these two amazing guys. Their passion and obsession around the idea of a robotic ball you control with a smartphone was awesome.

For one, it is articles like this that give me a lift when I am feeling down.  Second, it is articles like this that, if I was raising a round of funding, keeps Brad Feld at the top of my list (along with Fred Wilson). It feels like the start-up world is too cynical, most of the time. We are working on some unknown future and yet, when looking at the still-forming business, all we analyze is the guessed-at numbers and market opportunities.

I’ve spent my entire career so far trying to change the way we work with numbers. After all, our world is very different today — with always connected computers in our pockets — than how it was in 1979. And let’s face it, there have been far more tough days then good ones in the past 15 years. Sometimes it feels like all I have is passion.

 

Who’s Making Money in Mobile Apps?

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I’ve come to the conclusion that four groups are making money in mobile apps:

  1. Companies Who Make Games
  2. Companies Who Make “Pick Axes”
  3. Companies Who Use Apps To Sell Other Stuff
  4. Companies Who Develop Apps For Others

Games

Gaming is clearly the place to write apps and make lots of money. Trey Smith performed some interesting analysis. 22 of the top 25 grossing iOS apps were games (at the time of his analysis). All but four of those (18 of 25) were free-to-play with in-app purchase. Trey determined that the most successful games had the combination of lots of in app purchases and calls to action:

It’s pretty simple really… the more options you give your customers to purchase things the more money you will make.

This is because there are only a small percentage of users out there who spend money in games (like me).  Even though the percentage is small, typically those customers are interested in spending a LOT if they like the game.

Based on some released data, He determined that the #9 app was grossing $12 million per month in sales and an app that maintains a top 5 ranking for the year would gross at least $110 million. That’s an awful lot of Infinity Softworks’.

Pick Axes

Scott Kveton, CEO of Urban Airship, called his company a pick-ax company, as in selling pick axes to miners during the gold rush. Urban Airship, like appFigures, Flurry and others, sell services to developers. And clearly they are killing it. Urban and Flurry have raised at least a combined $45 million [1] and the CEO of appFigures told me he has been profitable since the company started.

Sell Stuff

I heard that eBay will sell billions of dollars worth of merchandise through their mobile apps this year. That’s billions with a B. But it isn’t just eBay that’s doing it. Evernote, too, is using a free mobile app to sell subscriptions to their service. And I’m not certain companies like Uber could even exist if it wasn’t for their mobile apps. None of these directly make money from the mobile app. Instead, they sell products or services by using app stores to get customers and apps to engage them. Using mobile as an entry point to a broader market or opportunity seems to be working for a number of companies.

Develop Apps

Small Society made a nice living creating apps for the Obama ’08 campaign, Starbucks, and ZipCAR, among others, before being acquired by WalMart Labs. The company that wrote the eBay app also wrote the app for Weight Watchers before eBay realized they needed to own the talent who wrote the thing. There are tons of these examples. Big companies have deep pockets and there’s an endless need for Android and iOS developers. Besides, custom development gigs have been a staple of software development long before the iPhone came on the scene.

Given that, it isn’t just traditional “contract houses” that seem to have made good money. There is a cottage industry of white label app companies as well. One of the ones I am more familiar with is Oceanhouse Media, who created a series of Dr. Seuss, Berenstain Bears and Mercer Mayer Little Critter books all using a standard software platform. Develop one product, customize it over and over again for different purposes, ship!

Let Me Sum Up

My conclusion: if you aren’t apart of one of these four groups then good luck building a company, let alone making enough to support yourself.

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[1] Making a false connection between a company doing well and a company raising lots of money. In this case, I believe Urban Airship is profitable and suspect Flurry either closely controls their cash flow or is also profitable.

Start With Free, Or Start With Freemium?

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The first thing most customers ask themselves is whether a product can solve their problem. The second thing most customers ask is what will it cost.

This second question poses a problem for freemium apps. It is fastest and easiest to get the free part of the product done first. It’s the part that people will try first, it’s the basis for the product. If people don’t use the free version, after all, they will never pay for the premium version. The problem though is that if we don’t set up the premium version right away then we never know if people will pay. So do we start with free and go freemium later, or do we start freemium from the beginning?

Assuming that time is our limiting factor [1], by focusing first on the free product it allows us to perfect and iterate on it specifically, making the best possible free product that attracts people to use it. With more users we can then query the free customers more easily to figure out which features are most important for the premium product.

It seems Glassboard took this approach. The company introduced its paid version long after having a free version. But this apparently caused customer confusion and concern. Brent Simmons, who helped found the company, said the following in a blog post:

It’s been hard to explain some of the text on the Glassboard home page:

Unlike Google, Facebook, and Twitter, we don’t mine your data to sell advertising. We don’t do ads.

You are our customer — not advertisers.

People would point out correctly that the app is free and we’re not asking for any money.

That kind of customer confusion is suboptimal and likely kept some customers from creating an account and trying the service.

On the other hand, we can release the free and paid version at the same time. In this case we can immediately start with a critical piece of data — will people pay? — in the very first group (cohort) of users. Evernote, I believe, took this approach. This, too, has problems. Again with time as the limiting factor, this means our development and testing attention is split between a longer and longer list of features. On top of that, figuring out where to draw the line between free and paid may take a number of conversations with users who have used the service, which we don’t have yet.

Maybe both are optimal positions and work best for different kinds of businesses. Clayton Christiansen, in The Innovator’s Solution (Amazon, Powell’s), talks about three different kinds of market disruption: new market, low-end and sustaining. New market disruption assumes we are competing against non-consumption; low-end assumes we are addressing a new market with a cheaper alternative; and sustaining assumes we are bringing a better product into an established market. [2]

The iPhone, as Horace Dediu would argue, is a new market disruption. At the time the iPhone shipped only 1% of all mobile phones were smartphones. The iPhone was intended to convert the 99%. Android, however, shipped as a low-end disruption. It was specifically intended to play the low-end counterpoint to Apple’s, RIM’s, Microsoft’s and Nokia’s higher priced offerings. I can’t think of a sustaining example in the mobile world [3], so I’ll go with the appeal of Netflix when it launched. Like Blockbuster but more convenient with a better selection.

For each of these business disruptors, it seems, maybe a different approach to freemium needs to be put into play. With a sustaining or low-end disruption, the basis for competition is well known. Customers inherently understand the product with a simple comparison. Android’s like iPhone but cheaper. Netflix is like Blockbuster but better. In these cases the customer inherently understands the product and just needs to be convinced to spend money on the alternative. Thus, having both free and paid at the beginning is optimal.

But new products require education, and when education is required the tricky part is getting anyone to even try the product. Getting any users, let alone paid ones, is the axis to optimize on. And thus, in this case, there is no need to worry about premium yet. Start with free first.

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[1] This is from the old axiom about how you can’t optimize on all three axes — time, money and people — only on two. I believe almost all new products are limited by time. If you have funding then your time is limited by the amount of money you’ve raised and how long it can keep your team together. If the new product is developed out of revenues, then the time available to work on the product is limited since attention must be paid to the projects that pay the bills.

[2] Page 44

[3] Maybe the move from 3G to LTE but that’s pure technology.

AT&T Rolls Out Mobile Share Plan

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AT&T rolled out a new plan last week called Mobile Share.

Instead of paying for each minutes, texting and data separately, all of these are bundled together into one base price and a price per device. For instance, we were paying $80 for 1400 minutes, $30 for unlimited text messaging, and $15 to $20 per phone for a small bucket of data (200-300 MB). We have three phones, one each for my wife and I and another phone that used to be Infinity Softworks’ primary line [1]. The total bill, excluding taxes and fees but including the extra device charges, is $180.

My phone and my wife’s are both iPhones. The company line is an Android phone. I had to buy a data plan for the Android phone even though it never leaves the house. That’s 300 MB per month that goes unused. My wife also doesn’t use much data on the go and I am routinely pushing up against my 200 MB limit, especially if I travel at all during the month. I sometimes pay an extra $15 in a month to get more data even though as a family we never go over the total 700 MB per month allotted between the three phones [2]. Most months we are also right around the 1400 minutes for calls, slightly above or slightly below. Luckily, AT&T’s rollover minutes keep us from paying per minute.

With the new Mobile Share plan, we get unlimited telephone, unlimited messaging and the choice of shared data. The base price goes up and the cost to add a device goes down depending on the allotment of data. For instance a 1GB (1024MB) shared plan is $45 base plus $40 per phone, the 4GB shared plan is $70 base plus $40 per phone, and the 6GB plan is $90 base plus $35 per phone.

The more phones the more effective the pricing gets. At 1GB, we will pay $165 per month for the three phones. Not only do we save $15 per month but it is far less likely that we will have to pay extra for data and I no longer have to think at all about voice call minutes. In addition we can use FaceTime over 3G now if we want (which the tech press is having a cow over but whatever). When the next iPad ships I can add it, too, for $10, which saves me another $10 per month as the current plan for its own data bucket is $20.

All in all, a nice plan. We switched this weekend.

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[1] We keep it around to tell people to send an email. Plus I like the idea of having an extra phone around the house in case of an emergency.

[2] 700 MB doesn’t seem like a lot but it is when on-the-go stuff is mostly focused on email, web searches, etc. In other words, I only do text-based stuff. I don’t download apps and don’t watch videos. The largest thing I do on the go is download maps and occasionally use the GPS system. Of course, most of my time is spent under a wifi umbrella…

Marvin Hinshaw

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I’ve talked about my early days of creativity, how I started around age 10 creating baseball board games, trying to simulate authenticity out of dice and baseball cards. And when I was 13 I got my first computer — an Apple IIc — and taught myself to program.

But my formal computer science education didn’t start until I was 15. We had just moved to South Florida and I was enrolled at a magnet school in central Broward County, just outside of Ft. Lauderdale. The only computer class at my old school was typing, or at least I didn’t know of any others.

After my freshman year of high school, a time when I was making lots of new friends and for the first time feeling comfortable with myself, I was uprooted to this foreign land. I was in culture shock, frankly. I moved from a town where having a car was a big deal to a place where driving a brand new Mercedes was nothing special. To make matters worse, most of the kids in my class had been going to school together since Kindergarten. And I was shy, making connections with the others very difficult.

Luckily, my parents had the foresight to enroll me in a programming class. I remember showing up on the first day. There were lots of students split between two rooms. Somehow we were segregated by experience and I was shipped off to the other classroom with the more experienced kids.

This is when I met Mr. Hinshaw. He was a kindly older man (at least to my 15 year old eyes), a calm persona (and boy would he need it in that class), and seemed to know what he was doing. That first year we worked on Apple IIe computers in BASIC. I did well enough that I was asked to join the advanced class the next year — we had Macintoshes and wrote in Pascal by then — and take AP Computer Science my senior year, all the time being in Mr. Hinshaw’s class.

That was one of my best experiences about moving to South Florida, an opportunity I would have never had if we’d stayed in Ohio. Mr. Hinshaw was instrumental in nurturing my love for programming. There were plenty of times I skipped class to go work on the Macs and Mr. Hinshaw never batted an eye. In my senior year he even gave me an award as the most outstanding CS student in my class.

While I haven’t talked about it here, I think about Mr. Hinshaw often and realize that if it wasn’t for him, I might not be running Infinity Softworks today. Thanks, Mr. Hinshaw, for creating the kind of environment where an awkward 15-year old could feel comfortable and let his talents show.