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Why App Stores Won't Survive

Eric Hernaez

The recent news that online retailing giant Amazon.com would open an app store to compete with Google's Android Market has set off a flurry of speculation about the future app store landscape. Within the next few months there will be no fewer than three major Android app stores, including the VCast app store recently announced by Verizon. Several other major players have announced app store intentions (including AT&T, Sprint, Motorola, Samsung and Best Buy in the U.S. alone), though specifics are lacking. And of course, there are existing independent app stores that publish Android apps, such as GetJar, SlideMe and Appbrain.

All this activity raises the question: How many app stores can the market sustain? I am going to go out on a limb and say that the answer is probably none. In fact, I predict that within the next five years, app stores will go the way of carrier walled gardens and consumers will get most of their apps directly from the developers and brands that create them. Here's why…

Until now, the app stores (by "app stores" I mean Apple's iTunes primarily) have served four functions:

  1. Making the Market: By generating market awareness and excitement about apps, the Apple iTunes store conjured a market for apps where there previously was none. The iTunes store is part of a virtuous circle: demand for apps draws developers into the fold; more developers means more desirable apps are created; more desirable apps means higher demand for iPhones; and more iPhones means even greater demand for apps.
  2. Curating: App stores are in a position to separate the wheat from the chaff. Nobody enjoys paging through dozens of 'crapps.' In a world with tens of thousands of niche developers and few well-known brands, the app store provides a service by keeping out substandard apps (as well as malicious or poorly executed code). The app store can also stimulate sales of selected apps by featuring them in a prominent location. While I don't have statistics to cite with regard to app stores, in studying consumer behavior in supermarkets, Wharton professor David Bell found that up to 45% of purchases are unplanned within the app store demographic of 'young, unmarried adults with above average income.' If the same proportion holds true for app stores purchase behavior, as I suspect it does, then the curation function could account for as much as $3.2 Million of the $7 Million that is forecast to be spent on apps in 2010.
  3. Feedback: Apps that receive positive user feedback outsell those that don't. No secret there. Numerous studies have shown that online reviews are second only to direct word-of-mouth recommendations when it comes to influencing online purchase decisions. By providing a forum for user reviews and comments, the app stores give prospective buyers a valuable information source that is not currently available anywhere else.
  4. Collecting Payment: Making the purchase process flow smoothly is a key ingredient for app sales. Online consumers are loathe to enter credit card information - especially for a one-off purchase of $0.99 from an unknown seller. And from the merchant's perspective, dealing with credit card fraud (both the malicious and friendly variety), and the resulting chargebacks, is as appealing as a stick in the eye. As a result, offloading this function to the app store is the best option available.

In a closed system, such as Apple's iTunes, the app store concept makes a lot of sense. By locking app downloads for iOS devices to iTunes, Apple has been able to carefully orchestrate the right mix of style and curation, resulting in the great user experience that iTunes is known for (let's not forget that none of this would be possible if the Apple devices were not compelling to begin with). In return for their efforts, they levy a very hefty 30 percent fee on any commerce thats conducted. Don't get me wrong, I believe that Apple is entitled to whatever it can command for its role in creating the market for apps. As I blogged about back in 2007, smartphones, as we know them today, would not exist if it were not for Apple. But, let's recognize iTunes for what it is. Apple's 30% fee and the tight control that it exercises over the iOS ecosystem are monopoly constraints that would be unsustainable in any open market situation.

Apps are digital goods that will naturally find the path with the least friction. And, all things equal, market participants will gravitate to the markets that are open. Of course "all things equal" is the key. Before demand for apps existed, and later when the iPhone was the only real smartphone available, all things were not equal. Apple held a natural monopoly and could afford to impose its "style" constraints in any way it chose. With the explosion of Google's Android OS, there now exists another smartphone ecosystem that is comparable to the iPhone and iTunes. As a result, the landscape must change.

In an open system such as Android, where it's possible to install apps from any source (known as side loading) the logic for an app store breaks down. Developers will market their apps through the channels that best suit their needs. Even today, there are hundreds of new startup companies developing better alternatives to the app store model. App recommendation engines such as Flurry, Appsfire and appSpace will duplicate, if not improve upon, the curation and feedback functions. Others, like BilltoMobile, PayNearMe, Bling, Venmo, Boku and Zhong, are giving consumers and developers better ways exchange money. As enterprising third parties find ways to innovate around payment, curation, and feedback functions, app developers will embrace them. And, as developers embrace open systems, new ecosystems will evolve.

Just like the iTunes app store made carrier walled gardens obsolete, open app store ecosystems will make iTunes obsolete. And if market forces don't do it, the Department of Justice will. After all, what's the difference between Apple's position with iTunes and the iPhone today, and the one that Microsoft had with Internet Explorer and Windows not so long ago? Not for nothing, the fact that Microsoft's Windows Phone 7 will not allow side loading virtually guarantees its failure, in my opinion.

In case it's not already obvious, my assertion is that there really isn't much of a role for a third-party 'store' in an open ecosystem for digital goods. That's why you don't find many software retailers online. I suspect this is also why Google has chosen not to invest any resources in the curation and feedback functions of the Android Market (much to the dismay of current Android developers). Unlike the enviable position that Amazon has carved out for itself in the world of physical goods, where fulfillment and physical delivery is a critical function, I can't see them adding much value to the delivery of apps in the long run. In a digital world, it's just too easy to bypass middlemen and go direct to the source.

By Eric Hernaez, Chief Executive Officer of Netmobo. More blog posts from Eric Hernaez can also be read here.

Related topics: Mobile, Web

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Comments

Interesting comments thread Eric Hernaez  –  Oct 18, 2010 8:08 PM PDT

http://www.reddit.com/r/programming/comments/dsulc/are_app_stores_just_a_fad/

Open ecosystem beats closed and fuels app creation. Shawn Capizzi  –  Oct 20, 2010 11:09 AM PDT

I think your point about an open ecosystem model for buying apps beating out a closed Itunes system is dead on. Why else would people Jailbreak their device. Users want a choice. They bought the device and they want to install the software they choose to. Why should we have to go to different stores, sort thru apps (apps deemed ok by the owner of the store) to buy one. Who has time for that. I'd much rather have the freedom to get my app fix from whatever source I deem OK for my mobile device. In return if I buy directly from the developer, the developer's 33% increase in revenue can prehaps fund the creation of my next favorite app.

Nope - Integrated beats fragmented hands down. The proof is in the pudding. Martin Hill  –  Oct 20, 2010 8:51 PM PDT

Eric,
I think you have got it completely wrong.

Where on earth did you get that figure that only $7 Million is forecast to be spent on apps in 2010?

iOS App Store downloads now total over 7 billion and are growing at a pace of 17.2 million downloads per *day* or a billion more every 2 months and accelerating.  By comparison, the number 2 App Store - GetJar - gets 3 miillion downloads per day and has taken 7 years to reach a total of 1 billion downloads across all platforms (and none of GetJar's downloads are paid apps).

iOS developers have so far made over $1 billion while Android developers have made only $21 million which is only 2% of that paid out to iOS developers despite the Android Marketplace launching only 3 months after the iPhone App Store.  Larva Labs highlights "how much of a cottage industry the paid Android Market remains, with insufficient sales numbers to warrant full-time labor for paid content”.

For a developer, the iOS App Store is an absolute no-brainer.  Apple handles all hosting, advertising, search and credit card processing costs.  Getting 70% is an absolute deal for the dev particularly compared to the past where Handango, Verizon and other online mobile software vendors used to charge 50-70% commissions.

"Open" App stores are the ones that are and will continue to struggle - The iOS App Store has the advantage of a one-stop-shop for both consumers and developers.  Having to go looking thru multiple 3rd party shops and developer web sites is just going back to the bad old days of never being able to find anything and most users never even knowing what was out there.

In addition, it is iOS that has the far larger installed base (120 million iOS devices vs low tens of millions of Android) and still higher sales of iOS devices worldwide (275-300,000 iOS devices a day vs 200-250,000 Android devices) and 160 million app-hungry, credit-card enabled, iTunes account holders means iOS developers have a significantly larger and more lucrative market who are one click away from purchasing their apps.

Then there is the matter of quality.  Because Google does not review or reject any apps from the Android Marketplace, an enormous amount of spam apps, a growing amount of malware and a large amount of "hello world", buggy, and just plain low quality apps now clog the Android Marketplace. 

John "DVD " Lech Johansen, the author of DoubleTwist the popular iTunes replacement for Android has this to say about the Marketplace:
"Google does far too little curation of the Android Market, and it shows. Unlike Apple’s App Store, the Android Market has few high quality apps.... just a few examples of what’s wrong with the Android Market. ... 144 spam ringtone apps (which are clearly infringing copyright) are currently cluttering the top ranks of the Multimedia category… Developers and users are getting fed up and it’s time for Google to clean up the house."

Larva Labs point out that "there were roughly 2,250 paid games and 13,000 paid non-game apps in the Market. The reason for the large number of apps vs. games is mainly due to the proliferation of spam apps, something which is much rarer in the games category".

Then there are the multiple malware apps that have been widely distributed from the Android Marketplace including the nasty wallpaper trojan that was downloaded 4 million times before being outed and the particularly malicious Russian Premium SMS texter trojan not to mention the continuous stream of bank phishing apps and spyware apps plaguing the platform. 

With piracy rates for Android software running between 50% and 97% and Android's easily circumvented anti-piracy measures, there is far less incentive for developers to commit to developing commercial software for Android.

The iPad has obliterated all competition in the tablet market with current iPad sales estimated to top 14 million units this year and 36 million in 2011. Many analysts predict that this dominance will continue into 2012 at least and overtake Netbooks in unit sales.  With 35,000 apps already custom designed for the iPad in addition to the 300,000 compatible iPhone apps, Apple has an enormous and accelerating advantage over Android.

In contrast, Google is trying to push developers to use Google Chrome as an OS and web apps instead of native apps for tablet systems by forcing manufacturers to include GSM phone hardware in their tablets if they want the device to have access to the Android Marketplace.

Then there is the fact that the iPhone and iPad benefit from the iPod's overwhelming dominance of the media player market (70-80%) and the HiFi integration market (95%) and iTunes dominance of the online music and media market (70-80%) all mean Android has a long hard road ahead of it.  With the iPod dock connector and steering wheel integration already either standard or an option in 70% of new cars, you won't get that sort of integration with an Android device.

Yes, you are correct that the multitude of app stores on Android and other platforms will indeed continue suffer, but you are completely off-base to assume that Apple's iOS App Store is going to do anything apart from increase its meteoric rise in popularity and profit for Apple, developers and consumers alike.  The new Mac App Store for desktop computer software demonstrates how compelling this model is for Apple and 3rd party developers alike.

-Mart

Who is Martin Hill? The Famous Brett Watson  –  Oct 20, 2010 10:08 PM PDT

I don't have any immediate comment on the substance of your post, Martin, but there are some things I find curious about its circumstances — and subsequently about you.

You registered your CircleID account yesterday, evidently for the express purpose of commenting on iOS-related matters (from a staunchly pro-Apple standpoint). Not that there's anything wrong with that — but clearly iOS is a thing for you. This got me to wonder about your angle, so I searched on "Martin Hill" and "iOS", and I found that you have indeed been a prolific poster elsewhere on this same subject. The very post to which I am responding is substantially cut-and-paste from something you posted elsewhere back on 9th September. Not that there's anything wrong with recycling relevant material, but it's worth noting that this is part of a standard rant, not an extemporaneous defence.

So — wow — you clearly spend a lot of time extolling the virtues of iOS and the associated company, practices, marketplace, and so on. Is there anything you want to disclose about your angle on all this, or is it just a hobby of yours? Because, you know, I appreciate it when people disclose — or disclaim — vested interests.

Conspiracy theories abound. :-) Martin Hill  –  Oct 20, 2010 10:46 PM PDT

Hello Brett,
I make no attempt to hide who I am unlike most denizens of comments sections across the web.  - I am an IT professional at a university in Australia and you will find my home page http://web.me.com/mart_hill linked to many of my other posts around the web.

Yes, I do post rather prolifically (my vice perhaps) and do often re-use portions of text from previous posts when appropriate.  When the same topics are discussed on multiple websites often with the same sources quoted, it saves time and hassle.

In terms of my perspective, this is just an interest of mine motivated as I am to add the other side of the story to many articles and blog posts to hopefully balance out extremes in the other direction.  There has been a considerable rise in pro-Android hype from many corners of the web that has been understandable considering the many companies and individuals who have been significantly marginalised by Apple's encroachment into many new markets in recent times.

Of course no one is truly un-biased and I certainly sit pretty firmly in the Apple camp, but I hope my arguments and stated facts stand alone as useful counter-perspectives to the views expressed in articles like this one.

If you see any fallacies in my arguments, I'm always keen for a dialogue. 

-Mart

HTML5 Alex Tajirian  –  Oct 28, 2010 10:43 AM PDT

Eric,

A different take on apps reaches your conclusion but for a different reason.

HTML5 poses a medium- and long-term threat to apps. However, apps will not disappear overnight because they still make business sense for some companies to create fast platform-specific content. But, as standards are developed and incorporated into HTML5, Web development will be easier, and thus, the Web will regain its prominence as the main platform for new services.

HTML5 development is driven by creating tools to satisfy demand, not an abstract standard that is developed top-down. Some industry heavy weights, like Apple Inc., favor it and Microsoft, for the most part, has stayed away from backing any standard.

Your thoughts?

Alex,I do agree that html5 will eventually Eric Hernaez  –  Oct 28, 2010 12:43 PM PDT

Alex,

I do agree that html5 will eventually become an important part of mobile app development.

However, in my opinion, html5 by itself can't replace the need for a store.  My thesis is that stores are useful for curating (discovery), feedback and collecting payment - all of which still need to be done with an app built on html5.  As shown by the presence of Phonegap apps in iTunes, a developer using html5 might still need to list his app in iTunes to meet those needs.

But, if better methods exist to perform those functions (as I predict will be the case), then the stores will be obsoleted because their raison d'etere will vanish. 

My opinion: while html5 might hasten the evolution away from app stores, it won't by itself be the cause.

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