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

Page 1 of 2

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.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!