Solon Partners

On 23 July 2009 Apple  pulled the developer license for the one of the world’s most prolific iPhone developers - Perfect Acumen. The Pakistani development team led by founder Khalid Shaikh has launched 943 applications on iTunes - which  is about 5 apps a day, every day, for 250 days. This armada of apps was reportedly earning  a total of several thousand dollars per day (full list of his apps http://www.yappler.com/Developer/98920/Khalid-Shaikh.aspx )

Other development houses such as Brighthouse Labs have also capitalized on the strategy of releasing a flood of cheap simple apps, with over 2,000 apps available at $0.99. Together these two companies’ apps accounted for about 5% of all applications for the iPhone.

Shaikh’s revenue model was simple - develop simple apps such as news readers targeted at every major niche topic -“US Army News” (military) “WWE Updates” (wrestling), “Skin Care Updates” (cosmetics),”iSoaperStarsUpdates” (soaps) etc. The price of the app was $4.99, and their only function was to pull news feeds for internet sites with keywords for that target niche.

Over the course of 9 months and 900 separate reviews and approvals, Apple did not detect what it now asserts to be  hundreds of Shaikh’s apps using copyrighted images without permission. Clearly this shows that enforcement was not overly stringent during the past year. The mere volume of apps being published over such a short period of time under one developer name should have triggered some additional scrutiny.

The decision to ban Shaikh appears to signal Apple’s strengthened enforcement of its developer policies. Now that Apple has reached  50,000 app milestone, enforcement of application quality will likely go up the priority list. Even though the price of the apps is 4.99 or less, customer expectations are surprisingly high and buyers feel cheated when they realize that all they get is a second rate RSS feed.

It is important to note that Apple did not ban Shaikh because it sold applications with poor quality and low value to the customer (such a termination would be contractually very difficult to defend), but it had to premise the termination on the alleged IP violations. To improve customer experience Apple is certainly willing to enforce it’s developer agreements, and updated restrictions seem likely in the future.

Unlike the usual outrage by developers against Apple’s ban decisions, the Shaikh’s license revocation has been greeted with a modicum of support. Everyone agrees that  iTune’s customers in general are willing to tolerate only a handful of purchases gone bad and cases of buyer’s remorse before considering switching to other providers - whether that is going to push customers to look for big brand  and/or famous studio apps (read EA and ), jail-broken apps or downloading free apps from torrents.

Regardless of which of these three options  diverts customers, it is not good for independent developers. Shaikh was an easy target, but the diffult task is still ahead - it is in the interest of Apple and all indi-developers to resolve the issue of perceived value and transparency in application quality.

yrjo uncategorized iPhone

It has been over 6 months since the last time I purchased a CD.  Meanwhile this does not mean that there is no music in my life. I share  music with my friends, I listen to samples online and watch videos on You Tube. I also regularly purchase audiobooks on Audible.com clear proof that I am willing to pay for mp3 files. Nevertheless, despite repeated attempts - I have been foiled every time I have attempted to LEGALLY download music from iTunes in Estonia.

Despite large displays and ads for the iPhone in Estonia advertising how to “easily” download music and movies to the iPhone - there is no LEGAL way to do this. EMT (the only authorized seller of iPhone in Estonia) store representatives taught me how to ILLEGALLY sign up with a Finnish address and trick the system with a foreign credit card or gift card number in order to be able to pay for my music  (a lot of effort required to get them to take my money).

Meanwhile, Google has provided Chinese consumers with a great solution - free music.  Recognizing the reality that Chinese internet users were downloading free music illegally anyway, Google teamed up with the music industry to provide music files for free to everyone, and funding the service by advertising revenue from the site.

President of Google China - Kai-fu Lee said to the New York Times that “We hope this will move the landscape to a legal model.”  The Times reports that according to IFPI (representing 1400 record companies in 72 countries) 99 % of the online downloads of music in China are illegal.

However, it turns out that  there is more than just moral obligations and desire to bring justice to Chinese online society behind Google’s decision. Google has been consistently loosing ground to Baidu, which has now over 60 % market share of  the Chinese search engine market.  The most significant driver of Baidu’s growth has been offering music search services and linking to sites that offer free downloads of music.

This kind of a dual system of treating European music downloaders as criminals and blocking music downloads from UK YouTube (subsidiary of Google), while creating a free searchable and downloadable database of music for Chinese users smacks strongly of hypocracy. Looking strictly at the situation - Google seems to be saying that in order for us to get the same opportunity - we need to start using alternative search engines and downloading more music illegally.

I for one, I am starting to do more searched on Mahalo.com - a very interesting and successful human powered (search results prepared by people) search engine started by Internet entrepreneur Jason Calcanis.

yrjo software iPhone, iTunes

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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