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Apple's App Store already nearing pace of $1 billion business?

post #1 of 8
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As Apple's 9-month young App Store redefines the smartphone industry and spawns copycats, actual app sales are approaching a frequency that could see the digital shop become a billion-dollar business before year's end.

In a report on quarterly smartphone market trends released Tuesday, Needham & Co. analyst Charlie Wolf noted that the number of applications on the App Store recently surpassed 25,000, with actual downloads exceeding 500 million.

"[T]he iPhone App Store has redefined the smartphone industry," he said. "In a game of 'follow the leader,' most operating system platforms, including Android, Windows Mobile, Palm and Symbian, announced they were opening similar online stores."

Attempting to quantify actual dollars generated from app sales (which Apple doesn't report specifically), the analyst backed his way out of a reported $303 million increase in the company's 'music-related sales' for December quarter, which includes sales from the App Store/iTunes Store. Assuming iTunes sales were flat year-over-year but iPod accessory sales grew in line with the players themselves, he subtracted $100 million to arrive at an App Store sales estimate of $203 million for the three-month period ending December.

If accurate, the assessment would have the App Store generating approximately $800 million on a yearly basis, already surpassing a "neutral" case scenario for the 2009 calendar year outlined by fellow analyst Gene Munster of Piper Jaffray last June. With the number of applications downloaded each quarter only increasing, it's conceivable the store could reach the $1 billion milestone and possibly Munster's $1.2 billion "Aggressive" case scenario by year's end.

Meanwhile, Wolf doesn't believe Apple is concerned with rising third-party app stores like Cydia and others, as described in detail yesterday, because the goal of the App Store is to lock subscribers into the platform. Apple runs it as a breakeven operation.

In his view, the smartphone market had been a "major bust" until the App Store came along and software started selling hardware again, as was the case with personal computers.

"In our opinion, the iTunes App Store has achieved such a compelling first-mover advantage that it's effectively consigned its would-be competitors to a second-class citizenship," he wrote.

iPhone Sales Steady

Looking at iPhone sales, the Street veteran also used his report Tuesday to soften the negativity of IDC figures showing a 37% decline in iPhone shipments from September to December.

"The decline chiefly reflected IDC's practice of measuring shipments into the carrier channel rather than sales out of the channel," he wrote (emphasis added). In contrast, the analyst estimated sales out of the channel actually remained flat at 4.7 million units in both the September and December quarters.

Wolf recommends looking at the number of new subscribers, not sales into the channel, as a much more reliable metric of how the iPhone is faring. Â*In the fourth quarter, the iPhone added 4.4 million new subscribers globally to outperform the BlackBerry's 3.5 million.



However, his findings do not include the current quarter's results, which may reflect the economy's continued woes.

Trends and Issues in Apps

Returning to the App Store, Wolf also outlined three emerging trends and issues in the market for mobile applications. First is what he referred to as "garage" developers, who write apps for the iPhone on nights or weekends in very small, one- to three-person shops. Second was the discovery challenge, which is summarized as the difficulty for a given application to get noticed. While Wolf takes note of the third-party web sites reviewing new applications, such as our Backpage Blogs, he is concerned that enough developers won't find a financially rewarding experience to keep the store robust with fresh content.

The discovery challenge leads to Wolf's third point, a "rush to the bottom." If there are too many low-priced apps, leading more developers to abandon their efforts for a lack of revenue, the creation of more "serious" applications could be hampered. In the analyst's opinion, Apple must solve these problems in order to maintain its competitive advantage in locking subscribers to the iPhone platform.

This comes after other recent challenges (1, 2) for the iPhone developer community.
post #2 of 8
Bravo Apple!! Keep it up.
post #3 of 8
Two quickie comments. One is that the financial market really hasn't a clue on the financial and competitive impact of App Store. Two is that most of the competition hasn't a clue on what App Store really means from a platform perspective.

It means having a good toolset that is compelling to developers, and deeply integrated across hardware, software and service layers.

That part is really hard, and getting that one right is part of the reason that Microsoft became the PC Gorilla. For the competition, who may only control one or two of these pieces (e.g., hardware and system software but not actual mobile service, or in case of Android, software only), the reality is that this means that for better or worse, they will be solving a different problem.

Add onto that the iTunes media piece, which no one else offers, and you have something that looks simply like an application store, marketplace and wallet, but which combines developers global access to one type of device across carriers, rich tools to build apps addressable on same, deep integration and the leverage of the largest seller of music on the planet (bigger than Wal-Mart).

That's leverage, something the numbers spotlight, regardless of metric (developers, downloads, dollars, margins).

Here's a post I wrote on the topic:

iPhone 2.0: What it Means to be Mobile
http://thenetworkgarden.com/weblog/2...e-20-what.html

Check it out if interested. The article links off to a few other posts that analyze the space from different perspectives (SDK, Apple's governance of the platform, iPod touch, etc.)

Cheers,

Mark
post #4 of 8
Not sure if the $1 billion figure is very accurate, considering a broad swath of apps are free or only 99 cents. If true, this is outstanding news.

Proud AAPL stock owner.

 

GOA

Reply

Proud AAPL stock owner.

 

GOA

Reply
post #5 of 8
Maybe Apple could do something artificial like increasing their percentage cut for very cheap apps, that would force the prices higher...

Not suggesting that's a good idea, but it's one thing they could do. Highly unlikely though.
post #6 of 8
One thing that copy cat stores such as the Android Store and Blackberry store may not be taking into consideration is what if developers don't flock to the platform like they did the iPhone. what happens if the App Store continues to grow and the others only have a few thousand apps? Even if those few thousand apps are all that are needed or worthwhile having huge numbers like The App Store will make the others seem inferior. This has been Apple's trouble with the Mac compared to Windows for years. Even though there where and are more than enough apps for the Mac people still point out how many more there are for Windows. And who knows what will happen with the Pre - being only available on a dying network certainly won't get developers excited about writing tens of thousand of Apps.
post #7 of 8
In a market that used to command $20-$60 for simple apps, Apple's app store sure has pushed that down considerably, and that's probably a shock to developers for the other closed platforms.

It is a disappointingly strong downward Wal*Mart-ish price pressure, but given the uptake of the platform, the different might be made up in volume, a lot of the other handheld platforms had a pretty limited audience.

I think that the market will settle out eventually. Maybe the developers can come up with unique & compelling features that would justify a higher price for some customers. Just having something that's better than shovelware can help.
post #8 of 8
Quote:
Originally Posted by SpamSandwich View Post

Not sure if the $1 billion figure is very accurate, considering a broad swath of apps are free or only 99 cents. If true, this is outstanding news.

Note that the author came up with this figure based on the revenue increase of the iTunes store. The free apps could not attribute to that in any way. In fact, they could have negative impact by increasing the spending on bandwidth, storage etc.
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