What's App? A look at the emerging apps economy

The state of play of the apps market and the barriers to its development - by David Rowan, Editor of Wired Magazine

The apps economy is booming: the supply of application programmes that harness the powerful capabilities of smartphones in innovative ways is being met by thriving consumer demand. This is an area of great opportunity for the UK - for its vibrant development scene, for investors and mobile carriers, for content and service providers who are able to reach consumers using new platforms, and for public bodies that can use apps to deliver public services 'straight into people's handsets'.

But there are also challenges: uncertainty about which platforms to target and what business models to adopt, lack of transparency in the behaviour of some platform providers, and privacy and infrastructure issues. The public sector may have a role to play in helping to address some of these issues, so that the UK can reap the full benefits of this fast-growing, highly innovative market.

Today, 22 March 2010, NESTA hosts 'What's App', an event which will consider the opportunities and challenges that the Apps economy presents for the UK. The insights and discussions from this event will feed into a more detailed report to be published at a later date.

Introduction

The computing power, multiple functions and location-aware capabilities of smartphones have created new opportunities for innovation in the shape of apps - small application programs which often fulfil a single task. The smartphone has become a games and entertainment console, a social-networking connection, a location-aware map, an augmented-reality navigation appliance, a sports data tracker, a barcode scanner, TV set, video camera, e-reader, productivity booster, shopping basket and - don't forget - a communication tool.

Innovation in hardware and software has come together with new digital distribution methods. Apple launched its App Store in July 2008 to distribute free and paid-for applications for the iPhone and iPod Touch. By September 2009, more than two billion apps had been downloaded from a selection of 85,000 produced by more than 125,000 developers - this number had risen to 100,000 by November, and now stands at 150,000. Where sold, apps generate a 30 per cent commission for Apple.

Meanwhile, Google launched its Android Market in October 2008, a rival app storefront for its open-source Android phones. Within a year there were 14,000 apps, and now there are 20,000. Google takes 20 per cent commission on sales. The following April, BlackBerry's parent company Research In Motion also launched a store, RIM AppWorld, with 4,000 apps now available; Nokia launched its own Ovi Store in May 2009 with a further 3,000; and in June, Palm launched its App Catalog for the Pre handset, with 300 apps.

The iPhone's built-in payment channel in particular has proved that consumers will spend: Pinch Media estimates that 610 million of the first two billion App Store downloads were paid applications. A separate survey by AdMob last summer found that Android and iPhone users downloaded around ten new apps a month, and iPod Touch owners 18; and that half of iPhone users and 40 per cent of iPod Touch users buy at least one app every month (compared with 19 per cent of Android-based phone owners). Indeed, recent research from FADE suggests that 98.9 per cent of downloads in the Android Market Place are of free apps.

There are no official estimates of the size of the app economy, but mobile ad-serving business AdMob estimated last July that around $200 million worth of applications were being sold in Apple's App Store every month - some $2.4 billion a year. Matt Murphy, who runs Kleiner Perkins Caufield & Byers's iFund (a $100 million investment fund in collaboration with Apple to back startups producing iPhone apps), estimates the size of the app economy at $2 billion this year, double what it was in 2009. Other estimates predict the market to rise to $20 billion or more by 2013.

The Opportunities

This is a time of vast growth in the apps market. Of around 5 billion handsets in the world, smartphones make a tiny but fast-rising proportion. In Western Europe, 3G mobile penetration has risen from 17 per cent in 2007 to 29 per cent in 2009 and is forecast to reach 67 per cent next year; in Japan it is already 91 per cent. The lesson from Japan is that mobile content generates vast revenues: Morgan Stanley estimates that $43 billion was made from the mobile internet in Japan in 2008, two-thirds from mobile data access, one-fifth from mobile commerce such as virtual goods and 11 per cent from paid services including mobile banking and travel booking. Eight years earlier, that market in Japan was worth just $6 billion, almost all from mobile data. Europe is today where Japan stood back in 2000. Mary Meeker at Morgan Stanley points out that internet adoption by iPhone and iPod Touch users has grown eight times as quickly in its first two years as desktop internet usage did when rolled out by AOL.

The business opportunities include revenues from virtual gifts inside games; real-time information; in-app purchasing of premium content; location-aware purchasing; mobile payments; mobile advertising and ebooks. The iPad, due in the UK in April, is designed to offer easy consumer access to content - from TV programmes to books and magazines - while also supporting apps designed for the iPhone. An estimated 50 similar tablet devices are due to launch this year.

For developers, numerous opportunities exist. These include being able to reach global audiences through the many competing storefronts. The developer chooses the app price, typically pays no credit card fees or hosting fees, and in the main storefronts does not pay for the delivery of free apps. There are many opportunities to harness the phones' capabilities in creative new ways: by accessing the handsets' multitouch, GPS, accelerometers, two way messaging, geolocation, real-time information and camera, the developer can create new uses (such as augmented-reality property prices or restaurant guides imposed on the camera's view).

For brands and marketers, there are new opportunities to reach consumers at low cost. AKQA recently launched the new VW Golf GTi using an iPhone car-racing game based on an existing bestselling game, Fireminds Real Racing. At a cost of $500,000, VW achieved three million downloads; by comparison, a conventional 2006 campaign to promote the Mk5 GTi, cost $60 million. Barclaycard, similarly, have claimed vast success for its waterslide game offered as an app.

For investors, the growth curve of smartphone adoption offers unusual opportunities. Some venture capitalists talk of a 'goldrush': Tim Chang of Northwest Venture Partners, which has $50 million invested in the app economy, points out that investors have more to win by focusing on the platform and service providers, rather than betting on individual apps: "It's too difficult to predict which developers will make money, so we're backing the pickaxe suppliers. The guys who made it really rich in the goldrush were Levi Strauss selling jeans etc - the enablers and suppliers." Distribution platforms are experiencing fast growth: Getjar, a UK/California-based cross-platform app store, says it has provided 840 million downloads from 313,000 registered developers to 2,000 supported devices.

The Challenges

For developers and providers of content and services, there is uncertainty about which platform to target. Should they provide apps for one store or all? Should they choose an open or closed marketplace (Android or Apple?), a mobile or a web-based store, or simply aim to deliver their app through the emerging HTML5 web-browser standard? Should they build for iPhone, Android, Symbian, Windows Mobile and BlackBerry? Should they develop for the iPad - even though Apple refuses to support Adobe Flash, an industry standard - or for rival Windows 7-based tablet devices? "I don't envy the developers trying to find ways of prioritising their development resources," says Microsoft UK's James McCarthy. "They've got to make a judgment on the long term future of the platforms and whether it fits with their kind of customer."

The jury is also open in respect to the most suitable business models - Freemium or in-app purchase may work (especially for social-gaming businesses such as Playfish and Zynga), but only research can determine whether they are suitable for a particular app-provider - at a time when the retail price of apps is heading lower.

And competition is intense. How do you promote your app? Discoverability is a key challenge when there are 150,000 apps in the store. How will consumers find your app?

For content providers, there is no certainty that the investment in high-value apps- for example, for the iPad will generate revenues that cover development costs. And even success stories such as the Guardian's £2.39 iPhone app, which was downloaded 70,000 times in four weeks, generated a relatively small sum (£167,300) compared with the newspaper group's losses of £100,000 a day in 2008/09.

Such uncertainty over return on investment makes it difficult to write an effective business plan which may have to be modified down the line anyway: British company Shazam, founded in 2002 to help consumers identify music through premium-rate texts, is now a freemium music-retailing business.

Apple's controlling approach and lack of transparency have also created challenges for developers. Delays in the approval process have caused financial losses for some: most controversially, Apple's six-week refusal to approve the Google Voice app prompted the US Federal Communications Commission to launch an inquiry last July. Apple's software developers' kit makes very strong demands from developers: a copy obtained by the Electronic Freedom Foundation states that developers are banned from making "public statements" about the agreement; that Apple reserves the right to reject or remove from the store any iPhone or iPad app unilaterally; that apps so removed cannot be offered on another platform if first developed for the iPhone; and that, should an error with Apple cause an app to fail, the maximum compensation for the developer is £33. Joe Hewitt, who developed the Facebook app, says: "Apple's controlling tendencies are hampering the app economy. Not only have they rejected a number of very useful apps, and asked developers to cripple their apps by disabling features, but they have no doubt scared off countless developers."

Apple's tendency to censor apps is also controversial: it recently demanded that the Bild-Girl app, produced by the German newspaper Bild, censor images of topless women in the newspaper PDF that was available as an in-app purchase.

For consumers, there will be increasing market confusion as smartphone adoption moves beyond early adopters. Surveys suggest that many consumers cannot distinguish between handset maker, carrier and platform: so if each is running its own app store, there is a risk of atomization that will limit the market's growth. There is no consensus about how far consumer choice should be limited by quality control: to what extent do consumers demand active gatekeepers filtering the content available in storefronts, by contrast to the open nature of the web?

For telecoms providers, a major challenge is the capacity of existing network and wireless capacity to cope with vastly increased demand. Apple has just paved the way for larger iPad apps with 20MB 3G downloads; what happens when the streaming of movies becomes more common? How will data plans adapt? Poor coverage for iPhone subscribers has already caused a customer backlash against AT&T in the US. Carriers appear to have lost the battle to retain control of their subscribers' internet use: in 2007, 57 per cent of UK mobile users accessed the carriers' mobile website, yet by 2008 that was down to 22 per cent - as Google went from 44 per cent to 82 per cent. Separately, telecoms providers are threatened by the growing popularity of VoIP apps that seek to undercut their revenue stream.

Policy Implications

Network infrastructure: As smartphone penetration rises, it is unclear whether the UK telecoms infrastructure will support the fast-growing data demands. Who will provide the extra investment necessary and on what time-scale?

Universal access: It is government policy to encourage universal access to the internet. When the internet is increasingly accessed through mobile devices, how will the government ensure that there is comprehensive and reliable national coverage, and at an affordable price to consumers?

Provision of public services: Are central and local government ready to reach citizens through mobile apps? If this is consumers' preferred means of accessing the Internet, they will expect to renew their driving licence, or pay council tax, via their phones.

Privacy: Should there be greater regulation of the data that smartphones are encouraging consmes to share? Services such as Latitude and Foursquare encourage the disclosure of location-based information as well as personal identifiers. Is this data safe in the cloud - and in the hands of private companies?

Healthcare: There are currently at least 2,000 health-related apps - from WaveSense's Diabetes Manager (helps diabetics to track their glucose results, carbohydrate intake and insulin doses) to Fertilityfriend (optimizes pregnancy chances). As mobile-health services become more widely available through smartphones, the health service can save money by empowering patients to monitor their own health and only calling the doctor when the data says they need to. Does the NHS have a plan?

Business enterprise promotion: There is a role for the local enterprise bodies to promote the app economy by bringing developers together for meetings and helping them share experiences and access support that they need.

Conclusions

There is no denying the potential scale of the market, and the vast opportunities for businesses to benefit from the potential of the App economy. As Android's product manager Erick Tseng observes: "That mobile device is never more than a metre or two away from my body, even when I'm a sleep. It knows all my friends through contacts applications; it knows where I am because it's got a GPS chip; what I'm doing, as I've got my calendar stored on it; and it's got all this contextual knowledge about me. That's very powerful. A business that's looking to engage their customers, that's looking to deliver a much more personal, mobile experience, will have to think about building a mobile application."

The market is changing fast. It remains unclear how mainstream smartphone adoption will change the balance between the various app distributors. Certainly Apple's dominance and lack of transparency is a cause of concern among many developers. Additionally, until common standards are agreed, it is not cost efficient for many developers to make their apps available to a variety of store fronts.

The UK is in an excellent position to take a lead in the app economy. The creativity of technology and design hubs such as east London's 'Silicon Roundabout' is already leading to a growing cottage industry of programmers who are creating internationally successful apps. Some government co-ordination could reduce potential frictions between developers, platform providers and consumers, and help to address network capacity limits. Finding the best way to do this in such a fast-moving market will be the challenge for policymakers.