I’m not sure there’s much chance of building a successful business selling through an App Store. And I know how hard it is to generate service revenue off a Web site, whether you’re aiming at mobile clients or not. So, I have a question: Is there really any money to be made in mobile apps?

I think there is, but I think the only way to do it is via a new kind of partnership, one that is only now becoming possible, with the mobile network operators.

[Context: I’ve been a Web guy almost as long as that’s been possible, for business and pleasure too. Recently, I’ve been intensely interested in the mobile market (see Mobile Gold and Experimental Engineering) and more specifically the Android platform.]

A billion mobile devices are being delivered per year, more or less. This makes the space interesting from a business point of view, but consider also that for many people in the less-developed parts of the world, these new devices represent their first and only exposure to the Internet. Thus, I think there’s an opportunity here not only to make some money, but to change the world in a beneficial way.

App Store Businesses? · I would be reluctant to try building a business on the Apple or Android or Palm or any other app store. Given the typical less-than-$10 price point, the volumes you’re going to have to reach to see meaningful income levels are frighteningly huge. A business model built around a steady succession of moderately-priced upgrades is a little more plausible but unproven (and disallowed at the moment in iPhone-land).

That Apple store in particular has been taking a pretty severe beating recently; consider for example David Weiss’ The Inhospitable Land of the App Store. It’s hard to feel sorry for Apple, which is making buckets of money on iPhones, based in part on all the great apps independent developers are cooking up, while at the same time treating them like peons.

I suspect that the problem will go away simply because what Apple’s trying to do just can’t be scaled up, and the pain will come to outweigh the profit. Which is just as well; Developing for the iPhone at the moment is like picking up dimes in front of a bulldozer.

But let’s not let Apple’s current problems divert our attention from the real problem with the app store: the price point forces you to bet on volumes in the millions to have an even marginal business.

It’s the Cloud, Stupid · Most interesting mobile-device apps are going to have a server-side component. First of all, the mobile devices just don’t have enough power or storage or battery life to be interesting as standalone platforms. The best thing about a mobile device is that it’s connected to the Net, where you can interact with any person or service in the whole world; this capability to be used, even if for nothing else, for silently and safely persisting data upstream to something that can’t be accidentally dropped into a toilet bowl.

The Online-Service Business Model · Unfortunately, it isn’t much easier. The landscape is littered with the corpses of online service offerings with one model or another for making money. If you can drive huge traffic, there’s money in advertising. If you have a popular real-world product to sell, there are old-fashioned retail margins. Direct subscription is tougher, and once you get past 37signals, there are just not that many outfits making a go of it.

So, What Will People Pay For? · Or, as Guy Kawasaki asked recently: Will Anyone Pay for Anything? His piece is sort of depressing; young people in particular, a demographic many public-facing businesses would like to reach, apparently are very reluctant indeed to open their wallets.

But I thought the article failed to highlight its really important findings. These people all had cellphones plus they spent a lot of time online. That meant they were paying their phone bills plus some sort of ISP charges, direct or indirect; for a high proportion of people, that’s all one bill. What we’d all really like would be to get on that bill. What chance, then for some sort of partnership with the network operator?

Network History · A little history is in order; everybody knows that before the iPhone, there weren’t many interesting mobile apps. The main reason was the insistence of the mobile network operators that they control every aspect of their relationship with their customers.

One thing they turned to be really bad at was creating a landscape where developers could flourish or even wanted to play. I can remember getting pitches from smart young people with good ideas for making cellphones more useful; I’d have to tell them that their customers weren’t going to be their customers, their customers were going to be the network operators, so they’d have to fight their way through a phalanx of telco middle management who couldn’t reasonably be expected to have much of a feeling for innovative new street-flavored apps. Also, that the telco would expect a slice of every penny at every stage of the business, and probably a bunch of up-front money.

Whatever you think of Apple, they deserve immense credit for breaking down those walls and showing the good things that happen when you let developers connect to customers.

Network Hate · As a result of all this history, most people in the software-development community have built up a visceral dislike of the network operators, and a basic assumption that they can never do anything but get in the way. I don’t know how fair that perception is, but it’s a fact of life.

It doesn’t help when we encounter irritants such as the AT&T network buckling under pressure from iPhone users.

A Hard Question · Why would AT&T want to invest in fixing their network? Everybody’s on a fixed-rate data plan, so they’re not going to get any more money.

On the one hand, they might be afraid of losing customers. On the other, the customers they’ll lose are precisely the ones who are hammering the network and making those fixed-price economics hurt.

And it’s not like people have stopped buying iPhones, so what exactly is AT&T’s motivation again?

If people get irritated enough to switch networks in volume, wherever they go is going to end up with a ton of fixed-price business and, just like AT&T, incented to keep people from actually using bandwidth.

I’ve made this argument before, in Flat Rate Considered Harmful, calling for a-la-carte data priced low, aligning the incentives of the people who provide the bandwidth and those who use it. It looks like #3 and #4 on my list have happened.

Now, if you read the comments on that piece, a bunch of people wrote in saying “It’ll never fly because the telcos will rape us on bandwidth charges” or (slight variation) “People will be too scared to try because they’ll worry that the telco will rape them on bandwidth charges.” This fear is legitimate, but let’s just assume hypothetically that there were a telco that saw an upside in avoiding rape; in being fair and transparent. To achieve this, I have two more suggestions:

  • The charge per unit of bandwidth decreases steadily the more you use.

  • The telco offers a trivial network service so that every handset can provide a continuous readout of how much you’ve used and how much of a bill you’ve run up.

Also required would be a polished and in-your-face marketing campaign to reset those rape-fear expectations. I’m thinking something along the lines of “Pay for what you use. But not much.” Or “No surprises. Low bills. Next question?”

Once again, this does assume the existence of an operator willing to take a chance on fair and transparent pricing. That’s something of a leap, I know, but businesses that take the right leap are the ones that win.

And I have another, really radical, proposal: The telcos should incent the developers to help them sell bandwidth by giving them a cut of the revenue.

How To Win · Bringing it all together: Here’s a recipe for how a smart, courageous network operator could turn the mobile-Net business inside out, do the world a favor, and score a business triumph:

  1. Offer a-la-carte data at a price that seems ridiculously low.

  2. That price falls steadily (per unit of data) as the amount you use ramps up.

  3. Provide a lightweight billing-info service so every handset can display how much data you’ve used, how much of a bill you’ve rung up, and what your charge per unit has come down to.

  4. Open up the network. Let anyone connect anything to it, and download apps from anywhere, and let the apps do anything they want. Get out of the way.

  5. Don’t ask developers for any money. But sell the use of your billing system at a really attractive rate, so people can sign up for apps and have charges billed to their phone plan. Do this with enough hands-off efficiency that an app can charge a dime a month and still make money on scale.

    (It’s like this: would you rather sell an app to a million users for $1.99, once each, or charge them a dime a month? Work it out.)

  6. Pay developers a small fixed commission on every dollar of bandwidth revenue their application generates for the operator.

  7. Watch your competitors play catch-up because all of a sudden you’ve got all the cool applications, and are getting paid for the bandwidth you provide.



Contributions

Comment feed for ongoing:Comments feed

From: Bill Mill (Sep 14 2009, at 09:27)

My naïve assumption is that regulatory issues would make any sort of plan like this very unlikely. Does anyone know enough to say if that's true or not?

[link]

From: Steven Cheng (Sep 14 2009, at 09:48)

I think the online service model has a lot more room to grow, I've been using a couple quite regularly and none are 37Signals.

-TimesReader

Even though the content is the same as the web version, it's nicely designed and really brings you pretty close to a real paper experience.

-CooksIllustrated.com

A lot of free recipes online but these ones almost always "just work". The videos are also great.

-FreshBooks

Still on the free plan, but if I had multiple projects going, it would be worth it.

-Tickspot.com

On the free plan, as with FreshBooks would be worthwhile if I had multiple projects, but I think I would want some more features if I started paying.

[link]

From: Andrej (Sep 14 2009, at 11:41)

Your vision is almost dreamy, but I think there's a big psychological barrier for the telcos to do something like this.

Utilities are not sexy.

Content, however, is. (The celebrities are all in Toronto for TIFF, not for some neat new way of digitally distributing films to theatres.) Telco types have wanted to be Masters of The Content for years now.

And they're not alone -- look at what the financial types have done with their attempts to transform banking from a utility industry into something sexy and super-profitable.

[link]

From: Sam Penrose (Sep 14 2009, at 12:28)

"These people all had cellphones plus they spent a lot of time online. That meant they were paying their phone bills plus some sort of ISP charges, direct or indirect; for a high proportion of people, that’s all one bill. What we’d all really like would be to get on that bill."

Andrew Odlyzko has explained repeatedly and exhaustively why you aren't going to get on that bill: people pay to connect (via voice and SMS and email and ...) with other people they know, as they always have (via landline and telegraph and snailmail). Applications, media, etc., are simply worth much less and always have been. See "Content is not King" and "The case against micropayments":

http://firstmonday.org/htbin/cgiwrap/bin/ojs/index.php/fm/article/view/833/742

http://www.dtc.umn.edu/~odlyzko/doc/case.against.micropayments.txt

and generally:

http://www.dtc.umn.edu/~odlyzko/doc/recent.html

[link]

From: gvb (Sep 14 2009, at 13:04)

Suggestion: "while at the same time treating them like peons." - s/peons/sharecroppers/ with a link to:

http://www.tbray.org/ongoing/When/200x/2003/07/12/WebsThePlace

<blockquote>

6. Pay developers a small fixed commission on every dollar of bandwidth revenue their application generates for the operator.

<blockquote>

I'm concerned that #6 would turn into Dilbert's (Wally's) "I'm going to code me a minivan." :-/

[link]

From: Daniel Veillard (Sep 14 2009, at 13:25)

points 3 4 5 6 hum ... you're trying

to reinvent the Minitel but on a

variable rate for bandwith

http://en.wikipedia.org/wiki/Minitel

The business case would be delivering

sex related content and possibly apps

improving the service like on-demand.

Funny that business plan led to the

emergence of a new Telco here >:->

it didn't fully reach its original goal

but we now have very cheap and good

bandwidth

Daniel

[link]

From: Andrew (Sep 14 2009, at 13:51)

You found Guy Kawasaki's article on whether the youth of today will pay for anything depressing? Really? I would have thought staunch proponents of open source software like yourself would be cheering them on with cries of encouragement :-).

However, as you said, whether they know it or not they do pay for a lot of software, they just don't pay for software that is also available for free. For instance I bet they buy all their Xbox games that are used on their Xbox Live subscription. They also buy all their hardware which these days almost always comes with embedded software, and in the case of mobile phones, very complex embedded software. They buy their wired and wireless bandwidth, which again wouldn't exist without complex software running the various elements in the network. They probably even buy some app software like Photoshop (even Elements) or MS Office and many of them will buy their OS.

As an aside I think your premise that young people are desirable customers is somewhat flawed. Young people have a lot of time on their hands which means they can afford to invest the time to do things like make Linux work as a desktop. I'm at the other end of the spectrum, I have a full time job and a young family and my time is precious. I want stuff that just works, I want computer hardware, firmware, drivers, OS and app software that somebody else has integrated together. I want to buy music with a single click. I want to read my Yahoo! email while in line at the grocery store. I'm where as a youngster I never thought I would be, which is that time is truly more important than money.

Whether there is ever going to be a real business in mobile phone apps is still open for debate in my mind. There are some paid iPhone apps that are popular. I think I read somewhere recently that the "Flight Control" game has sold over 1.5M copies at $0.99 each. That game is not complex either graphically or algorithmically, a single developer could have written it. $1M in revenue isn't a drop in the ocean for Oracle but it could be a life changing event for an individual.

[link]

From: Jarek Pi­órkowski (Sep 14 2009, at 14:30)

"Utilities are not sexy."

And to add to this, they're not high margin. But eventually, we'll need the telcos to give up their chase of sexy and become just utilities, dumb pipes with maybe a billing functionality built in as suggested. Can you imagine the water company offering to install a waterpark in your backyard instead of just hooking up the pipe?

[link]

From: Greg Pfister (Sep 14 2009, at 17:52)

Or, you could base your service in Europe and ignore the whole iPhone/app mess. See http://www.guardian.co.uk/technology/2009/apr/23/mobile-phones-telephony, "Why mobiles are the market of the future."

[link]

From: Jacek Kopecky (Sep 14 2009, at 17:56)

ISPs and mobile operators should be utilities. But can they *become* utilities?

How did utility companies evolve? I bet the water company didn't evolve from an entity that ran or installed waterparks.

I suspect governments (on any level) may need to get involved. Does utility imply a natural monopoly?

[link]

From: Charles (Sep 14 2009, at 20:09)

I have been hammering away at this for several years, with very little success.

The single most valuable asset a telco owns is their billing system. Currently, you can't get access to it.

A forward-thinking, risk-taking telco *might* let certain 'valued partners' have *some* access. That would take lots of meetings, presentations, deals and contracts. Nonsense.

The first telco who opens up its billing system to *all its customers* will achieve something amazing. Suddenly, everyone has a merchant account! You can send me a dollar by texting a code to me. Or, I can buy something from your mobile app - for 10 cents.

Micropayments, mediated by the mobile phone, and all transactions happen via your phone bill. Imagine the phone company sending *you* money.

A dumb telco would cream off 20% per transaction. A smart one would take 1%.

The problem is that *everyone* in a telco assumes that someone else will stop this, so I've never managed to sell it. Off you go, people! All I require is eternal gratitude and beer.

[link]

From: Denton Gentry (Sep 16 2009, at 13:50)

> Pay developers a small fixed commission on every dollar of

> bandwidth revenue their application generates for the operator.

This is great, but does it still leave the app developer and carrier a little bit out of alignment in terms of increasing the bandwidth used by each individual customer?

As a customer uses more bandwidth, the revenue per bandwidth unit goes down yet the carrier would have to spend the same amount of money to upgrade their infrastructure. For the carrier there comes a crossover point: they are better off optimizing the bandwidth use of the applications than paying for network upgrades.

The app developer has less incentive to optimize their bandwidth usage. The app has to be efficient enough to have good responsiveness, and cannot waste so much bandwidth that the customer abandons the app due to the bandwidth bill. The app developer otherwise is incented to use as much bandwidth as they can, there is no hard ceiling.

The carrier and app developer are both incented to get more customers to use the app, rather than milk existing customers, because the revenue per bandwidth unit goes down in volume. Their treatment of existing customers has slightly different incentives, I think.

[link]

From: Fazal Majid (Sep 17 2009, at 13:48)

Stop making excuses for AT&T. No other iPhone carrier worldwide generates the same level of complaints. That's because the others actually do the work we are paying them for.

I pay them about $300 per month for 2 iPhones and two dumbphones. I would have ditched them a long time ago if they didn't have iPhone exclusivity in the US. I'm pretty sure the cost of providing non-garbage connectivity is far less than the $7500 I will pay over my 2 year contract.

AT&T's so-called 3G network is barely faster than the EDGE network they used for the iPhone 1G. EDGE, of course, is laughable by world cellco standards.

Non-Americans (well, non-USAns) don't realize that AT&T (SBC, really), unlike Verizon, is notorious for starving its network of investment and milking it for all it's worth. They bandy around a figure of $18B in upcoming investment, but this is across all products, wireline, broadband, wireless and equipping the CEO's golf club. For a company with $112B a year in turnover, this is not an excessive sum or a significant commitment.

[link]

From: Mauricio Arango (Sep 18 2009, at 14:33)

I agree with your analysis and conclusion that the flat rate model isn't beneficial for consumers, application developers or telecom providers.

However, usage culture change is very difficult and consumers need solid assurances that their bills aren't going to skyrocket. There is valuable experience to borrow from prepaid voice services. So in addition to the mechanisms you propose, adding a prepaid option could reduce concerns.

Another perspective to consider is that some application providers could pay for bandwidth costs. This is the model used by the Amazon Kindle, where the end user pays to Amazon, which in turn buys bandwidth services from Sprint. A similar service appliance model could be used for other mobile applications even if they run on an iPhone or other smart mobile device.

[link]

From: Jacek Kopecky (Sep 18 2009, at 18:19)

Mauricio's suggestion has triggered the following scary train of thought: if application providers would pay for the bandwidth, I bet Google would be among the first to pay for free access to the search functionality (at least that). Then other search engines would all but be forced to do the same. Youtube would get a big hit if it showed up on the bills as the bandwidth hog it is, so Google just might pay for that too. This looks like a very slippery slope where the little guys get screwed because they can't foot the bandwidth bill for their users. Wikipedia might suffer, too. Etc. Any obvious flaws in this reasoning?

[link]

From: Mauricio Arango (Sep 22 2009, at 08:31)

Jacek, the concept is not new. In voice communications services the best known example is toll-free (800 or freephone) service where the called party pays for a call. I don't see this as applicable to all services but as a tool for promoting new services or as a mechanism to embed enhanced bandwidth functions, such as QoS, in the cost of a service.

[link]

From: Trevor (Sep 24 2009, at 00:46)

Uhh and a dime is worth..?

[Gentle reminder: the web is worldwide and though most of us are familiar with dollars, your named coins aren't in everyday use]

[link]

From: Jacek Kopecky (Sep 25 2009, at 06:42)

Mauricio, I didn't think of toll-free phones, and yes, it's a similar situation. But since phones are of very limited use, whereas bandwidth can support rich applications, I suspect the slope is more slippery (or steeper) with bandwidth than it was with the phone.

[link]

author · Dad · software · colophon · rights
picture of the day
September 07, 2009
· Technology (81 fragments)
· · Mobile (84 more)
· Business (107 more)

By .

I am an employee
of Amazon.com, but
the opinions expressed here
are my own, and no other party
necessarily agrees with them.

A full disclosure of my
professional interests is
on the author page.