These Headwinds Could Dethrone Apple Inc. (AAPL)’s App Store

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In Part 1 of this series, we examined the competitive advantages Apple Inc. (NASDAQ:AAPL) has with its App Store, and how this translates both to recruitment of developers and consumers to the iOS platform. Now as we continue our interview with Network Anomaly, developers of the app “Relay Stuff,” we’ll discuss whether this prime source of profit comes with an Achilles heel.

Apple Inc. (NASDAQ:AAPL)

Revenue

Me: How does Apple Inc. (NASDAQ:AAPL) derive revenue from the app store?

Relay: Right now, there are two ways. The first is the purchase of an app itself. Whatever the selling price, Apple takes 30% of the revenue.

Me: So millions of app purchases at $0.99 start to add up.

Relay: Exactly.

Me: What’s the second way that Apple Inc. (NASDAQ:AAPL) derives revenue from the app store?

Relay: What’s referred to as “In-app purchases.” Let’s say you download Zynga Inc (NASDAQ:ZNGA)’s Scramble or one of their other games that’s free. They rely on making money on in-app purchases. You play Scramble, they allow/urge you to buy credits to play more games in a time period, or to unlock things.

When you do, Apple Inc. (NASDAQ:AAPL) gets its cut. In-app sales make sense for certain types of mobile apps, like games or content service offerings, and Apple will continue to derive revenue from the in-app purchases. Free apps are the growing leader in the number of downloads, and alternative models for developers to derive revenue could cut into things if they gain traction.

Me: And what are the alternative models?

Relay: Advertising. In the aforementioned Zynga game, you might never buy a thing, but Zynga will still profit from you, and Apple might not. Developers can still make money through advertising, referrals, incentives, etc. Things that Apple doesn’t necessarily get a cut of.

Me: You used the word “might?”

Relay: Yes. You are currently allowed to use any ad network you want, and Apple Inc. (NASDAQ:AAPL) has an ad network called iAd, but it is one of many options out there, and often developers integrate multiple ad networks. Using a mediation platform to coordinate ad fulfillment across networks is common. Google Inc (NASDAQ:GOOG) offers that as an integrated piece of their AdMob service. It’s very convenient.

Me: Do developers make a lot of money using just the advertising model?

Relay: It’s improving and there are stories of apps that can make significantly more with an ad-supported, free app rather than a pay app. But honestly, at this point traditional ad banner models don’t work as well in the mobile space. People just are less willing to click on banners, and many clicks are by accident (this has probably happenned to many a reader out there,) thus the conversion rate is much lower than on desktop or tablets.

Me: So people using the iPad will convert well?

Relay: Yes, better than the average cell phone, but it’s still a small percentage of the overall mobile user base, though in terms of sheer numbers, tablet users are growing.

Me: According to NeoWin.net “Tim Cook has revealed that Apple paid out $8 billion to developers, up $1 billion in just one month. The $8 billion payout will net Apple around $3.5 billion in revenue, a substantial figure from a service that is just 5 years old.”

Relay: It’s quite a cash cow. Those numbers can definitely encourage developers.

Me: What challenges do they face going forward?

Relay: Well, we just spoke of the advertising model that Apple Inc. (NASDAQ:AAPL) is missing out in part, unless people choose to use iAd. There may be other models looming that could undercut some of that revenue  unless Apple can start offering more options for developers to monetize, thereby keeping its cut of the action. The growth of Android market share means Apple has to offer other value over the competition to entice developers to continue innovating and launching in the App Store. To stay in this game, they will need to expand the services developer’s can use to capture more of the growing market.

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