Solon Partners

While across Europe the center-right , far-right and green parties are celebrating their election victories with the center-left suffering a historic defeat. In Estonia the big winners are the center- left party and an independent candidate, with the greens and center right showing weak results.

This may seem quite odd to most Europeans and may be written off as further proof to some of failed integration of Eastern Europe, but actually the result makes perfect sense when put into perspective through the local political context. Like elsewhere in Europe the voters voted with their pocket books - the state of the economy was the central issue.

Left wing won based on voter dissatisfaction with the economy

Center-left party (Keskerakond) won the election with 103 525 votes. Their campaign capitalized on the dissatisfaction with the ruling coalition’s inability to deal with the economic crisis which has resulted with drastic pre-election buget cuts of popular programs.

Protest vote went to Independents

The same protest vote that showed the extent of voter anger and frustration with the continuing economic crisis and high unemployment fueling gains by far right in Italy, Netherlands,  Austria, Hungary, Denmark, Slovakia and Finland was the force also behind the independent candidate  Indrek Tarand’s 102 509 votes. Estonia has a fairly small foreign-labor population (no Turkish, Polish or Algerian laborers here to blame for high-unemployment) so the anti-foreigner anti-immigrant theme was not picked up by any parties for their election propaganda.

Ruling right wing parties lost due to the economic crisis

The center-right (Reform and IRL) parties’ coalition has been in power since before the beginning of the economic crisis. The right wing parties that were elected into office under the promise to get “Estonia into the top 5 wealthiest nations in Europe in 5 years” were punished by the voters facing the stark reality of salary, pension and benefit cuts. Therefore, it was inevitable that the voters blame the center-right for its inability to deal with the economic crisis, and the draconian budget cuts that have now been implemented.  This voter backlash explains why the right wing parties did not triumph in Estonian elections, but were glad to just hang on to their seats. In the final tally the Reform party received 60 899 votes and IRL 48 489 votes.

Greens have failed to win economic credibility with the voters

The Green party is still seen by the average Estonian voter as a one-issue novelty group than a legitimate political force that can realistically propose and drive through a full platform of economic and social reforms for the entire nation. Many people also associate the Greens with their leader Marek Strandberg who is seen as a good public speaker as well as a vocal and intelligent critic, but unable to find the necessary political compromises to actually execute strategies.

In the end the Greens were unable to convince the voters that their ideas would bring back jobs and rapidly improve the Estonian economy, rather than making growth based on clean energy, agriculture and manufacturing slower and more expensive. As a result their votes totaled a mere 10 845.

Low voter turnout

Just like elsewhere in Europe voter turnout continued to fall as ever less people use their democratic rights to elect representatives. Only 43% of Estonia’s eligible voters voted (more than in 2004, but still rather low), on par with the low European turnout of 43%.  Although it should be noted that Estonia pioneered Internet voting for these elections, and the electorate seems to have enthusiastically adopted the e-vote with over 14% of the voters casting their vote electronically.

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Printing money is hard work

When writing my March6 blog entry I wondered when we would the United States be added to the list of countries resorting to printing money to boost the economy.  That day has already come.

In the words of Goldman Sachs analyst Jan Hatzius, the Fed is going to the “kitchen sink” strategy of throwing everything it had to jolt the economy out of its downward spiral.

The Federal reserve is dropping a $1.15 trillion money bomb into the bond markets to boost lending. Yes this money will literally be eased out of the printing machine in major quantities (official term being “Quantitative Easing”). Ok maybe I am not using  exactly the proper description they teach in the MBA program.

Wickipedia defines QE as follows:

The term quantitative easing refers to the creation  of a pre-determined quantity of new money ‘out of thin air’ through open market operations by a central bank as the start of a process to increase the money supply. It can, more simply, be understood as an indirect method of printing money.

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Twitter running live during a conference

Sunday when I was presenting at Arengufond’s (Estonia’s national venture capital fund) training session for the finalists of the Ajujaht entrepreneurial contest, I recommended that everyone try out Twitter. Only one person out of the whole audience had tried Twitter, and he had mixed feelings about the program. I also admitted that I had not yet decided if I like it and that “I have kind of a love hate relationship with Twitter.”

Nevertheless, on the love side of the relationship I would recommend trying it as described in Fred Wilsons blog post. During the Hacking Education conference Twitter feed was projected onto  the wall, so that users comments were showing up in real time, which in essence created a live blog of the event.

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Nokia today announced the opening of Ovi (Finnish word for door) - it’s version of the App Store. The first smart phone that can take advantage of the service is N97.

Developers can upload applications at publish.ovi.com. The revenue sharing system is identical to Apple’s 70%-30% split.

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The Wall Street Journal reported on Sunday that Microsoft would be following in the footsteps of Apple’s App Store and the Android Market and launching an “online bazaar”  to distribute software applications for cell phones running Windows Mobile 6.0 or later operating systems.

For those that say that the train has left the station and Microsoft is just too late we should remember that although diminishing, Microsoft still has the advantage both in hardware as well as software numbers. Although Apple’s market share share for smartphones jumped 3% last year, Microsoft’s still has a +30% advantage over Apple (13.3 % versus 9%). There are several iPhone type touch screen smartphones running Windows Mobile and Android coming to market in 2009, which should significantly slow down Apple’s market share grab.

For software Microsoft has seen a 7% drop off in apps development due to the major push by Apple in 2008, but the January 2009 survey of 400 international mobile apps developers by Evans Data Corp from Santa Cruz California showed that by a 40 % margin developers plan to target their enterprise applications for Windows Mobile over the iPhone, and 46 % more than for the Android platform. Many developers are also anticipating the release of  Windows Mobile 6.5 together with the application store. I have seen no data for games and entertainment applications, but one has to assume that there the advantage goes to the iPhone.

Nokia and Research in Motion are apparently also on the verge of launching their application stores, and with better revenue sharing than Apple App Store’s 30% bite. Good news for mobile application developers.

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iPhone’s App Store is still on fire -  in its first month, it generated $1 million a day in sales on 60 million downloads and by now has reached 500 million downloads since the launch. This kind of success has attracted the attention of a lot of developers, investors and enthusiasts, including us at Solon Partners.  On the back of all the buzz, I wanted to see if iPhone apps are a realistic way of making money.

iPhone sales figures

Although subject to some controversy and mystery in the past it now appears that Apple has sold roughly 13 million iPhones since 2007. The new generation 3G phones make up 6.9 million of the total. Apple has now become the world’s third largest mobile phone supplier following Nokia and Samsung. IN addition to making money off the phones Apple makes money by taking 30 percent of the total sales from the App Store. The success of the App Store has now reportedly forced RIM, Microsoft and Google to consdier developing their own store fronts.

App pricing and categories

Mobile Orchard has gathered a lot of data that shows that most apps in the Apple store are priced in the $0.99 and Free categories, although there are a few specialty apps out there in the $50 range as well. Mobclix has done a clear and useful bar graph analysis of the pricing trends and offerings. When looking at all of the application in the iPhone store 77.9% are paid and 22.1% free apps. Games (26%) are the top apps category followed by Entertainment (12%), Utilities (9%), Education (7%) and Books (6%). So the most popular offerings are 99 cent games.

Diagnostic tools show usage habits

New York City-based startup Pinch Media, (VC financed by Union Square Ventures, First Round Capital and some angel investors) has created for iPhone SDK developers free analytics tools to track apps usage. According to data gathered through their analytics on average, people use their apps 1.2 times per day with an average usage time of under 5 minutes.

Top Games

After reading stories of garage developers striking it rich, I was rather surprised to find that most of the top revenue earning games are made by BIG game design houses the games market - Vivendi, SEGA, Apple, PopCap, Gameloft, Xen Games and Electronic Arts. Only two (Fieldrunners and iHunt) in the top 10 are made by smaller developers. I should not have been surprised, this industry is no different than others where brand name recognition, marketing and reputation play a key role in consumers’ buying decisions. Hence we see in the 10 ten games today familiar names such as Bejeweled, Spore, Tetris, Crash Bandicoot, Texas Hold’em and others.

However, there is hope for the little guys too, iShoot Lite sales numbers should motivate the entrepreneurial minded programmers around the world to develop games. This month downloads hit 16,972 in one day, but have averaged approximately 10,000 downloads for over a month which translates into $21,000 of net revenue per day (if somehow sales could be kept at this level for a year this small studio game would make $7.6 million).

Another success story that has been widely publicized is the success of Trism developed by Steve Demeter. The game, which is essentially a bejeweled clone, sells for $5, and has netted the developer over $250,000 so far. Demeter allegedly spent only $5,000 developing the game.

Bottom Line

If you can develop and promote an app that people are interested in downloading, and keep your budget under control, real money can be made with iPhone apps.  If  we assume that you are selling your app for 99 cents, and you could sell it to 10% of the iPhone users in the world (1.3 million users), then after Apple’s cut you would net approximately $900K. Even with 1% total market penetration you would net $90K. Not bad at all, if you can keep your development and marketing costs at 30% or below.

Even on a small scale, entrepreneurs have seen significant success with simple apps like EleMints, which is basically just a copy of a periodic table of elements priced at $4.99, and which sold 3982 in 45 days (netting $13,909 for a few hours of work)

Companies have also launched apps first in the free category and then made the transition to the pay model as most vividly demonstrated by Tapulous’  Tap Tap Revenge, a Guitar Hero style game which currently has over 3 million users. The original free edition was financed partly through advertising revenue, but largely through Angel investors’ financial support. Recently the company released Nine Inch Nails and Weezer versions for $4.99, of which Apple gets 30%, and the remainder gets shared with the bands, labels, and publishers. Tapulous hopes to get to the breakeven point with $1 million in revenue in 2009.

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