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Why The App Economy Is Broken.

Mobile applications have been built for smartphones and tablets for about the last 7 years.

During that time, both applications and hardware have matured a lot in terms of their use cases, and can now be found in the most remote corners of the earth. However, content distribution has been constrained by both Apple and Google.

Smartphones, and the success of the companies who have built them, is largely down to the content creators. Both independent and corporate developers work so hard to create truly brilliant and engaging applications with the hope to entertain, inform and educate potential customers from all over the world.

Back in 2007, when the App Store first launched, there were only a few thousand active developers. However, in just over six years since its conception, the number of developers has grown almost exponentially, as have the applications available. Hardware consumers have had more linear growth, as you would expect.

Mobile as a market is arguably the fastest growing market in the world, it’s current market size is estimated to be $17bn and is expected to reach $58bn by 2018.

 

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This is only the beginning. A lot of change will (and needs) to happen in order to push innovation forward and speed up development to get better applications in front of customers who don’t know what they want, until you give it to them.

I hope that by reading this post, customers (people who download applications) and creators (the people who make them), will have a much better understanding on why they see the applications they do, and what needs to change for customers to see more relevant applications that could potentially make more of an impact in their life.

One of the most commonly asked questions of our era:

“Is there an app for that?”

Yes, there probably is, but you will never find it.

That’s a huge problem, and one worth solving because the best developers deserve a fair chance to succeed.

Of course, in every vertical you have winners and losers; otherwise known as Pareto’s principle.

However, we are currently in a paradigm where 1.6% of developers make more revenue than the other 98.4% combined.

This isn’t Pareto’s principle, this is total market failure.

Here are three reasons why this happening:

 

#1 Closed distribution channels

If I want to download an application on iOS, where do I have to go? The App Store.

If I want to download an application on mainstream Android devices, where do I have to go? Google Play.

Of course, on some Android operating systems there are a few other stores – but certainly the distribution channel with an incomparable market share is Google Play.

The singular channels of distribution, particularly on iOS, pose a massive problem for the majority of developers seeking traction.

The Apple ranking algorithms are well hidden (people can guess but the actual algorithms are unseen), and this means if a developer wants to push their  application into the charts then they are already fighting a losing battle. We have an idea that the Apple algorithm is based mainly on download volume, reviews and engagement, and the general consensus is that it’s weighted heavily towards how many downloads you receive.

On top of that, both Apple and Google still police everything that goes into their respective stores. As a developer, you are not truly free to innovate.

Guidelines like this mean that as soon as anything remotely disruptive or innovative comes into contact with a reviewer, it has a high chance of being killed.

 

Screenshot 2015-01-29 13.55.53
 

The web has never been restricted. You see both good and bad website and application use cases online, but the growth of innovation using the internet has largely been due to freedom.

Freedom to create, freedom to disrupt, freedom to explore.

Does this exist in the mobile paradigm?

The impact these restrictions have usually goes unseen; customers who could potentially benefit from a truly groundbreaking application will never see it. Potential customers don’t ever become actual customers of products that could create a defining movement or business.

It’s due to this logic that nothing has really been done about it.

Customers won’t complain because they don’t know what they are missing.

Content creators do complain, but don’t get heard because for Apple, its customers are the consumers of content, not the developers who craft the content.

If developers complain, their card is marked, and they won’t be able to distribute the products they work hard to create.

 

Screenshot 2015-01-29 13.56.03

 

I recently spoke to a group of developers who are part of a community I run. It was interesting to hear the overwhelming notion of when a new platform arises which drops the control, the customer spending power shifts – these developers will  leave existing platforms like Apple & Google.

In reality,  this is a long way off, and we have a classic chicken vs egg scenario. The developers need customers to make money, the customers need developers to build, in order to buy.

It’s a difficult situation, and I don’t think the larger corporations, or the developers, quite know how it’s going to play out.

One thing is for sure, change needs to happen.

 

#2 RTBs generate most traffic

As discussed above, the distribution channels (The Top Charts) are driven by install volume.

Because of this, as an industry we have seen a cataclysmic explosion in mobile advertising. In 24 months, Facebook has built a $6.4 billion annual run rate with it’s mobile advertising offering.

How do RTBs (real time bidding exchanges) work, and why are they a problem?

People believe that whichever application is top of the charts is a clear indication that it’s the best application in its category. That’s false.

Pushing search, the majority of installs are generated by mobile ad networks.

How AdMob, Chartboost, Playhaven all operate is simple:

  • A publisher joins the platform (a developer who wants to show ads in their app and get paid for every install he/she generates for another developer)
  • An advertiser joins the platform, adds their payment information, and starts advertising within the publishers application.
  • Advertisers bid against one another to buy more and more installs. The more they bid, the more their ads are shown in publishers’ applications and the more installs they will receive.
  • The advertisers will bid up to the amount they can afford to pay per install. For example, if the LTVU (Lifetime value of a user) is $4 they could in theory spend $3.99 on acquiring a user.
  • The mobile advertising network is the middle man who facilitates the transaction between said advertiser and publisher. For doing this, the network will take around a 30% commission.

Eventually then, if the advertiser has paid $3 for an install, the mobile advertising network will take around $0.90 (30%) and will pay the publisher (the developer who sent the install) the remaining balance, which in this case is $2.10.

Thanks to the volume driven top charts, eventually you have two applications with the highest lifetime value of a user buying all the installs the network can provide. This prevents almost every other developer from acquiring a user.

Due to this, the app economy ends up in the situation reported by Developer Economics, whereby 1.6% of developers earn more money than the other 98.4% combined.

As a community, we believe that a platform needs to exist where developers can trade installs and collaborate with one another as opposed to competing, in order for them to generate the awareness they deserve.

The best applications and developers don’t succeed, the richest do, and they are getting richer.

A lot of people ask me to define ‘best’ and many people tell me the best always rise to the top? No, they don’t – there are genuinely engaging, entertaining, useful and informative applications I have seen built by truly remarkable people.

There are many more needles in the haystack – but currently the only way to awareness is to buy your way to the top.

Independent developers are the true originators and innovators on the App Store – we need to give them more of a chance.

 

#3 Lack of platform competition

The reason why a lot of the issues in the mobile ecosystem continue to exist is because there isn’t much competition for Apple and Google.

There are a few interesting hardware manufacturers growing very quickly, most notably Xiaomi – it does however still run the Android operating system.

The most interesting player in my eyes has to be Mozilla. They have seen some interesting growth/statistics recently but have a very long way to go if they aim to grow their market share considerably.

There are other potentially interesting opportunities  for large companies to explore. Facebook would be in pole position to start building their own hardware and open distribution channels which may eventually force others to rethink the ‘walled garden’ approach.

Screenshot 2015-01-29 14.21.56

Firefox OS is one example of an alternative platform that is showing strong growth.

 

How does this play out?

‘Apps’ as we know them today have only been around since 2007, so the future is very much still to be decided and I will be the first to say that I believe apps are still in their infancy.

Apple and Google are by far the most dominant forces in mobile, but technology continues to move at an exponential rate. Developers are getting younger, and technical innovation is speeding up. I don’t believe the current mobile landscape we have is the end point, there are too many negatives from both a content creator’s perspective and a consumer’s perspective. Apple and Google will naturally continue to robustly defend their positions as driving forces, but over time companies will move swiftly to new areas which start to erode their respective positions.

With that said, both Apple and Google have the power to acquire or litigate against any newcomer, so it’s going to take more than just a company to reshape the landscape. The change needs to be driven by a group of incredibly willing and courageous entrepreneurs.

Change will happen, it always does, but only time will tell us where it might come from.

As my friend Doug Menuez once said to me:

‘Who will be the next Steve Jobs, and where will she come from?’

To keep up to date with the latest posts to hit our blog, follow us on Twitter or subscribe to our newsletter. If you’d like a free way to drive installs to your application, you sign up to Tapdaq here.

 



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