Free and Low-Cost Apps

After stirring some interesting discussion yesterday with a 2-year-old post about price deterioration in the App Store, I thought the topic worth revisiting. Much has been written about it, but most of that was done in 2008 and 2009 when the trend appeared most dire. I don’t think we’re much worse off at this point — most of the damage was already done — but I do have lingering concerns about the long term viability of selling mobile apps and the impact that may have on the entire mobile industry.

Here’s the quote I posted to Twitter yesterday:

The downward spiral in app prices caused by the Top 100 list and Apple’s relatively hands off approach during the first year of the App Store has created completely unrealistic pricing expectations that may haunt the entire mobile software industry for years to come.

When the App Store first launched, iPhone users were blown away that they could buy games like Super Monkey Ball for a fraction of what it had been selling for on consoles and other handhelds. But excitement about the $10 price point was quickly eroded as developers slashed prices to get attention and take advantage of the App Store’s unit based charts. The high end of the App Store gaming market quickly slid from $10 to $5, and within a year most great games were launched at 99¢, or quickly put on sale for 99¢. Today, only AAA games from EA and the like do well at $2.99 or more. And even those go on sale frequently to gain momentum in the charts.

In July 2009 the average price for games was $1.39 and all apps combined averaged $2.58. Today it’s $1.01 for games and $2.12 for all apps. Prices do tend to drop in a free market as competition, increased efficiency, economies of scale, and other factors come into play, but I still contend that Apple’s policies and the design of the App Store itself initiated and even accelerated the race to the bottom. It’s clear to me in hindsight that this was either Apple’s intent, or at least something they didn’t actively discourage. To Apple, apps are merely complements to their highly profitable hardware sales. And as Joel Spolsky posited, “All else being equal, demand for a product increases when the prices of its complements decrease.”

To the average consumer, the value proposition of buying an iPhone is amazing given the plethora of free and low-cost apps. After spending $200 on the iPhone 4S, it takes just a few bucks to load it up with Angry Birds, Facebook, Twitter, Instagram, Camera+, Yelp, Pandora, and a host of other great apps. If each of those apps were $10 and it took several hundred dollars to load an iPhone with great apps, the value proposition would be completely different.

iOS development has done nothing but accelerate, even as the average price of apps has dropped through the floor, but in my view, the App Store is far from the healthy, vibrant market it could be. Just look at recent trends…

Words With Friends, the current top paid app in the App Store, was released in 2009 as a 99¢ app and had a free, ad-supported counterpart. The developer, Newtoy, was purchased by Zynga in 2010. The app now shows ads and annoys users in a variety of other ways even though users still pay 99¢ for the privilege. Zynga has made it clear they think the value of Words With Friends is much higher than the 99¢ Newtoy was charging, and I agree, but I wholeheartedly disagree with their approach to remedying the pricing gap.

Temple Run, the current top free app in the App Store, came out in August of 2011 as a 99¢ app with some relatively benign digital consumables available via In-App Purchase. After seeing limited success, the app went free and shot up the charts. Even though the app is completely free to play, and the paid consumables don’t radically alter game play, Temple Run is currently the top grossing app in the App Store. The top grossing list is littered with similar free-to-play apps, and most of them are not nearly as generous as Temple Run with the mechanics of digital consumables.

Temple Run is a great success story and the developers, Keith and Natalia of Imangi Studios, are incredibly cool, thoughtful folks, but Temple Run and similar apps still concern me. Almost 10 million people are playing Temple Run daily and most are not paying anything for that entertainment. They’re not even paying with their attention by viewing ads. This may seem great for users, but I’m not sure it’s great for the long term viability of mobile app development.

The pool of time users spend on smartphones is staggering and growing rapidly, but it is not infinite. The more time people spend with useful/entertaining free apps, the less need they have to actually pay for apps. That doesn’t mean people will never pay for apps — the market for paid apps has continued to grow alongside free and freemium apps — but users have been conditioned to expect more and more for less and less.

The 99¢ price point works for mass-market apps that manage to gain momentum in the App Store, but those are few and far between. Many great apps languish even at 99¢ and few developers are able to charge much more than 99¢, even for high quality niche apps. I was reminded of that earlier this week when reading an App Store review of my app Gas Cubby: “The other downfall is the price. At $5 this is an extremely expensive app. But it does work well!” To most App Store shoppers, $5 is “extremely expensive” even for an app like Gas Cubby that “does work well” and helps users save time and money.

The two business models that seem to work best for free apps are freemium and “burn through VC cash until we figure out a business model or get bought.” In my experience, ads from iAd, Admob, etc. make very little money, even in a relatively popular app. Developers can work directly with larger companies to sponsor apps and/or direct sell more profitable ads, as I’ve done with Gas Cubby FREE, but it’s incredibly challenging to develop and maintain corporate sponsorships. At WWDC 2010, Steve Jobs positioned iAd as a way to help developers earn money on free and low-cost apps, but iAd has thus far been a big disappointment. Stacking digital pennies is precarious work.

Eventually, paying for apps may be more the exception than the rule, much like the web, but the business models that are evolving to make that work are often user hostile. On the web we see Facebook’s incessant push to dissolve privacy as they work on monetization. On the iPhone we’ve seen the rise of free-to-play, and other frequently abused attempts at monetization.

Ultimately, the users become the product, not the app. Selling users to advertisers and pushing in-app upgrades/consumables is a completely different game than carefully crafting apps to maximize user value/entertainment. It’d be a shame if the mobile software industry devolved into some horrific hybrid of Zynga and Facebook.

The evolution of the web does give me hope. Paying for software, services, and entertainment on the web is still the exception, but niche sites that deliver value are able to monetize through reoccurring subscriptions and other palatable means. App developers may eventually be able to charge for upgrades in the App Store and lots of great developers are desperately looking for amiable business models for survival in the world of free and low-cost apps, but the pricing expectations of App Store shoppers make it an uphill battle.

Opportunities are prevalent. Money is being made by the truckload. The gold rush is still in full swing. But as the industry matures, I hope we like what we’ve created. And I hope I’m still building apps. Neither is a given at this point.

david