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App Economy

The trillion-dollar newcomer

How many industries go from zero to $1.3 trillion inside nine years?

This amazing feat may never have been done before. But this is the headline story of the app economy.

It's estimated that the global app economy in 2016 was worth $1.3 trillion (from downloads, advertising and mobile commerce).

But the market hasn't hit the ceiling just yet. It will be worth $6.3 trillion by 2021.

This remarkable rise parallels the growth of smartphone ownership. Today, up to four billion people have one. Estimates suggest it will be six billion by 2020.

Market origins

The app era only started in 2008. Apple kicked it off by opening its app store a year after launching the first iPhone. Google followed shortly after with Android Market (later re-named Google Play).

As with so many innovations, the idea of downloadable mobile apps was not new. Companies like Nokia had previously experimented with software stores for their devices. But they were too complicated to use.

Apple and Google simplified everything. They created integrated platforms which guaranteed that apps would almost never crash. The stores were easy to find and navigate. The newly introduced touch interface made apps a pleasure to use.

Business model innovation: a new type of software distribution

Apps also changed the business model for making and selling software. Before, big publishers dominated. They made big budget products that they sold on physical formats (Office CD-ROMs for PC, Need For Speed CDs on PlayStation etc). With the app store, anyone could make a product quickly and (relatively) cheaply. And they could make it available fast too. No factories and trucks. Just a simple online upload. And no gate-keepers (wholesalers, retailers, distributors) standing between developers and customers. Just Apple or Google, which could approve products in days. For hosting and support, they would charge a 30 per cent revenue share.

The speedy, open and simple ecosystem enabled the most compelling app advantage of all: price. Suddenly consumers could pay a dollar or two for genuinely useful or entertaining software. Later, with the arrival of in-app advertising and in-app purchases, the price for most apps fell to zero.

Google/Android pushes the market to new heights

Months after Apple’s App Store went live, Google launched its own download store for Android phones. Today, Google Play accounts for 135 per cent more downloads than the Apple App store.

Why is this? Simply, because there are so many more Android users. According to Gartner, 87.7 per cent of all smartphones sold in 2Q 2017 were Android devices, while 12.1 per cent were iPhones.

Premium, freemium, advertising: How developers make money

At the start, the app economy was straightforward. Everyone charged for their apps. But it didn’t take long for new models to emerge. Today, there are (broadly) six options available to developers.

  • Premium
    • Straightforward: there’s a fee to buy the app. Apple and Google each take a 30 per cent revenue share. Since the advent of the freemium model, paid apps have declined in number. Just 6.5 per cent of Google Play apps charge a fee.
  • Freemium
    • Here, the app is free but the user can buy extras inside it. Many freemium apps offer basic features at no cost and charge for richer functionality or more levels. Some function for a limited time before requiring a payment.
    • Typically, the number of people willing to pay is very low though paying users can spend big sums.
  • Subscription
    • The subscription model asks users to set up a recurring payment over weeks months or years. It’s popular with media companies or those offering a specialised service. Apple and Google pay app makers 85 per cent of subscription revenue, once a subscriber has been paying for a year.
  • In-app purchasing
    • This is similar to freemium, but the purchases are for digital items rather than functionality. Game developers do this most, offering mobile-players better weapons etc. Dating apps also give users the option to enhance their profiles or see more metrics.
  • Advertising
    • eMarketer estimates that in 2017, the average US adult will spend 2 hours, 25 minutes per day using mobile apps. Where people’s attention goes, advertising always follows. And that has been the case with apps. Mobile advertising has now overtaken other digital platforms, and in-app advertising generated $72 billion in 2016. The spend looks set to grow, as brands switch their budgets and explore richer media such as video.
  • Mobile commerce
    • This describes the buying of ‘real world’ products and services from inside an app. This is a fast-growing habit, especially in areas like fashion. Clearly, this kind of monetisation is more relevant for existing brands (exploring the mobile channel) rather than dedicated app developers.

More growth ahead: the $6.3 trillion market

The big question is: can the app economy keep growing? The numbers are so extraordinary that some commentators have argued we’re at ‘peak app’. They have made various arguments to support this: users will switch to ‘dynamic’ mobile web sites that work as well as apps but require no download; they will gravitate to conversational ‘bots’ that can answer their queries more quickly; they will migrate from smartphones to new wearables that don’t support the traditional app format.

None of this has happened.

Instead, the smartphone/app pairing has retained its unique power. Worldwide app downloads in the year to the first quarter of 2017 rose 15 per cent to reach 25 billion. Based on this, App Annie predicts the market will be worth $6.3 trillion by 2021.

Geography and app categories: how the market is changing

The app economy is growing, but that doesn’t mean it is not changing. The biggest shift is the geographical balance in the market. In short, developing economies have started to overtake the US and Europe.

In 2016, India surpassed the US to become the largest market for Google Play downloads. In 2017, Brazil moved into second place.

Overall, China is now the world’s biggest country by consumer spend and app downloads. Its consumers spent 45 per cent more on apps in Q1 2017 than in Q1 2016.

Another big change is the type of apps people choose. There’s no doubt that in the early days, games dominated. They still comprise a significant portion of apps and user engagement. But non-game apps in categories like news, media and dating are growing faster. They grossed $11.5 billion in 2016, and could hit $34 billion in 2021.

And the history of the app market reveals there are always new ideas to be mined. The desire for self-expression and customisation products is a good example.

Market watcher Flurry reports a stunning rise in personalisation apps such as Android lock-screens and Emoji keyboards. It said user sessions inside these products rose more than 332 per cent in 2015.

Discovery: the app economy’s biggest challenge

While the app market is a remarkable success story, it’s far from perfect. Indeed, its biggest problems are a result of its success.

In 2016, the number of apps on Google Play passed two million. In one sense, this is tremendous news for consumers – a fabulous array of choices. But it does make discovery a problem. How do you find the right app? And how much can you tell about an app based on screenshots, a description and maybe a video?

Inevitably, there is now a flourishing market for app store optimisation (ASO). Here, developers can disrupt the system to make their apps appear higher up the results pages. Obviously, the bigger and better-off developers do more of this. As a result, the charts are dominated by a small number of big budget apps.

This is one reason why so many developers – often with excellent products – still struggle. Indeed, a 2016 InMobi report highlighted that 55 per cent of app developers make less than $1,000, while a third have managed fewer than 10,000 total downloads of their products.

Discovery: The rise of app install advertising

Clearly, the app business is a ‘long tail’ business. It’s why the phrase ‘there’s an app for that’ resonates so well. With billions of eager users, there’s the potential for thousands of app developers to flourish.

So is there another discovery solution besides ASO? Yes, there is. And it’s pretty obvious: paying for it.

Facebook was the first to bet on the potential of user acquisition for app developers. It launched a dedicated app install ad unit in 2012, and was immediately successful. Indeed, by 2015, app install advertising was generating $2.9 billion for Facebook – 17 per cent of its total ad revenue.

Inevitably others followed. Notably Google. Its Adwords-based campaign option, launched in 2015, lets developers easily run a campaign across Google search, YouTube, Google Play store and the Google Display network. The developer designates a target cost per install and a budget ceiling. It’s very straightforward.

And it too has been hugely successful. The company said it was driving one billion app downloads every four months in 2016.

Market experts are pretty bullish about the continuing growth of this relatively new ad business. BI Intelligence estimates that the US market alone was worth $5.5 billion in 2016 and could grow to $7.1 billion by 2020.

This boom is, of course, part of an extraordinary wider surge in mobile advertising. According to IHS Markit and the Internet Advertising Bureau, the sector grossed $83 billion in 2016, up from $52 billion in 2015.