Apple's App Store could emerge as $1.2B business by 2009
Investment bank Piper Jaffray is urging investors who typically focus only on Apple's hardware announcements to also pay attention to the company's iPhone software strategy, particularly its upcoming App Store, which could balloon into a $1 billion market by next year.
In a research note to clients early Wednesday, analyst Gene Munster said his $1 billion market prediction represents the better of a three-case scenario that would add anywhere from 1 to 3% in operating income for the Cupertino-based electronics maker by the end of the 2009 calendar year.
To arrive at his estimates, the analyst initially conceived a neutral case scenario in which he assumed 91% of a market comprised of 85 million multi-touch handheld users (61.6 million iPhoner users and 23.4 iPod touch users) would at one time or another tap into the App Store during the course of a year.
Munster based this assumption off the adoption rates announced at WWDC for the iPhone's existing services. Specifically, Apple chief executive Steve Jobs said that 98% of iPhone owners browse the web, 94% use email, 90% send text messages, and 80% use 10 or more of the integrated features of the phone.
"Mobile service adoption rates show that iPhone owners are more sophisticated mobile users, likely a result of both the user profile and the device itself," the analyst told clients. "The bottom line is that we expect similar adoption of the App Store to other advanced services."
Overall, Munster's Neutral Case scenario assumes 77.7 million active App Store users will download two applications from the service each year at an average app revenue per sue of $10 -- one free and one costing $10 -- generating sales of about $777 million and a profit of $163 million. However, he notes that adoption rates could actually be much higher given the quality and ease of use of Apple's iPhone experience -- or around 95 percent (or 80.8 million active users) -- which would bump revenues to $1.21B and profits to $254 million.
For his most conservative case seen generating $416 million in sales and profits of $75 million, the Piper Jaffray analyst assumed that only 75% of iPhone and iPod Touch users will download content from the app store. He reached this assumption based on recent data on content consumption on the current iPhone without the App Store versus other smartphones.
"According to April m:metrics data, 45% of smartphone users play a game on their phone at least once in a month," he said. "For iPhones, data suggests the rate is closer to 32%; however, we believe the rate of application users/gamers for iPhones is depressed given that third party developers were not able to produce applications for the iPhone previously."
With the launch of the App Store in early July, Munster believes the iPhone and iPod touch are actually on their way to becoming "superior gaming/application" devices. He noted that the same m:metrics data suggests iPhone users are 70% more likely to consume video on their phones, given the YouTube application that exists on the handset.
"Applying this 70% higher likelihood to the rate of game usage for smartphones, we arrive at 75% of iPhone users engaging in downloading third party applications," wrote. "The reason we believe this could be conservative is that the iPhone heavily overindexes other smartphones in advanced services."
Each of Munster's case scenarios assume a 60% operating margin on the 30 percent cut of App Store sales Apple will received. He maintained his Buy rating and $250 price target on shares of the company.
In a research note to clients early Wednesday, analyst Gene Munster said his $1 billion market prediction represents the better of a three-case scenario that would add anywhere from 1 to 3% in operating income for the Cupertino-based electronics maker by the end of the 2009 calendar year.
To arrive at his estimates, the analyst initially conceived a neutral case scenario in which he assumed 91% of a market comprised of 85 million multi-touch handheld users (61.6 million iPhoner users and 23.4 iPod touch users) would at one time or another tap into the App Store during the course of a year.
Munster based this assumption off the adoption rates announced at WWDC for the iPhone's existing services. Specifically, Apple chief executive Steve Jobs said that 98% of iPhone owners browse the web, 94% use email, 90% send text messages, and 80% use 10 or more of the integrated features of the phone.
"Mobile service adoption rates show that iPhone owners are more sophisticated mobile users, likely a result of both the user profile and the device itself," the analyst told clients. "The bottom line is that we expect similar adoption of the App Store to other advanced services."
Overall, Munster's Neutral Case scenario assumes 77.7 million active App Store users will download two applications from the service each year at an average app revenue per sue of $10 -- one free and one costing $10 -- generating sales of about $777 million and a profit of $163 million. However, he notes that adoption rates could actually be much higher given the quality and ease of use of Apple's iPhone experience -- or around 95 percent (or 80.8 million active users) -- which would bump revenues to $1.21B and profits to $254 million.
For his most conservative case seen generating $416 million in sales and profits of $75 million, the Piper Jaffray analyst assumed that only 75% of iPhone and iPod Touch users will download content from the app store. He reached this assumption based on recent data on content consumption on the current iPhone without the App Store versus other smartphones.
"According to April m:metrics data, 45% of smartphone users play a game on their phone at least once in a month," he said. "For iPhones, data suggests the rate is closer to 32%; however, we believe the rate of application users/gamers for iPhones is depressed given that third party developers were not able to produce applications for the iPhone previously."
With the launch of the App Store in early July, Munster believes the iPhone and iPod touch are actually on their way to becoming "superior gaming/application" devices. He noted that the same m:metrics data suggests iPhone users are 70% more likely to consume video on their phones, given the YouTube application that exists on the handset.
"Applying this 70% higher likelihood to the rate of game usage for smartphones, we arrive at 75% of iPhone users engaging in downloading third party applications," wrote. "The reason we believe this could be conservative is that the iPhone heavily overindexes other smartphones in advanced services."
Each of Munster's case scenarios assume a 60% operating margin on the 30 percent cut of App Store sales Apple will received. He maintained his Buy rating and $250 price target on shares of the company.
Comments
85 million multi-touch handheld users (61.6 million iPhoner users and 23.4 iPod touch users)
There's going to be 61.6 million iPhone users by this time next year? Yeah, right.
"The bottom line is that we expect similar adoption of the App Store to other advanced services."
This seems reasonable enough. However, so far we've got early-adopters, trailblazers buying the iPhone. Once the user base expands well beyond that, you could well see a far greater proportion of users unwilling to spend further; who are happy with the iPhone as it is and don't need any additional functionality, or don't think the additional functionality is worth whatever people might charge for it.
assumes 77.7 million active App Store users will download two applications from the service each year at an average $10 per app -- one free and one costing $10
Is this AI's mistake or Munster's? Because that's an average of $5 an app, not $10.
generating sales of about $777 million and a profit of $233 million
Profit? Er, no. How can a financial analyst be so f*cking clueless? That's $233 revenue for Apple (Apple take 30% of the app fee for themselves, the rest goes to the app maker).
So, he seems to have forgotten about store running costs and credit card fees. Idiot.
Each of Munster's case scenarios assume a 60% operating margin to the 30 percent cut of App Store sales Apple will received.
Hmm, either AI's not quoting him correctly, or he can't do basic maths.
Because 30% of $777 million is $233 million, which he said is "profit". If he's assuming a 60% operating margin, he should have said $233 million revenue and $140 million profit.
I know I will as soon as I buy my iPhone in Canada, (actually we will have 5 phones for the family members)
Apps I would like for the Iphone
REAL Time stock quote app or widget
Ability to trade from anywhere.
There's going to be 61.6 million iPhone users by this time next year? Yeah, right.
This seems reasonable enough. However, so far we've got early-adopters, trailblazers buying the iPhone. Once the user base expands well beyond that, you could well see a far greater proportion of users unwilling to spend further; who are happy with the iPhone as it is and don't need any additional functionality, or don't think the additional functionality is worth whatever people might charge for it.
Is this AI's mistake or Munster's? Because that's an average of $5 an app, not $10.
Profit? Er, no. How can a financial analyst be so f*cking clueless? That's $233 revenue for Apple (Apple take 30% of the app fee for themselves, the rest goes to the app maker).
So, he seems to have forgotten about store running costs and credit card fees. Idiot.
Hmm, either AI's not quoting him correctly, or he can't do basic maths.
Because 30% of $777 million is $233 million, which he said is "profit". If he's assuming a 60% operating margin, he should have said $233 million revenue and $140 million profit.
It may be an average of $5 per app, BUT it is still $10 per user which is what is used in the calculation.
It may be an average of $5 per app, BUT it is still $10 per user which is what is used in the calculation.
Indeed.
That's not neutral, that's hyperbole PR.
May be those cost are negligible.
I dont see Apps being a mass hit for phone. Surely everyone will at least pay for one a two apps. But i think there will always be a good free alternative on the App Store.
However games are different matter. I think Games will be big hit on the iPhone. Not to mention possible itunes music and video directly to iPhone.
I do like how Munster used the word "neutral" to his estimates --- when he based those numbers on Steve Jobs hyped up stats in a keynote speech.
That's not neutral, that's hyperbole PR.
Yea, because Jobs and Apple always give unrealistic outlooks and guidance.
Actually, Apple almost always under-projects revenue and profit margin and such these days. The prediction that has gotten the most discussion over the last year was the 10 million iPhones for 08. Just because people spent the year saying it won't happen doesn't mean that Jobs was being unrealistic. At the end of the year, most people now expect 10 million to be easily, easily surpassed.
This is not to say that I think Munster has put together the most convincing argument, by the way. In fact, it seems rather amateurish, but I wouldn't blame that on Jobs' hype...
Yea, because Jobs and Apple always give unrealistic outlooks and guidance.
Actually, Apple almost always under-projects revenue and profit margin and such these days. The prediction that has gotten the most discussion over the last year was the 10 million iPhones for 08. Just because people spent the year saying it won't happen doesn't mean that Jobs was being unrealistic. At the end of the year, most people now expect 10 million to be easily, easily surpassed.
This is not to say that I think Munster has put together the most convincing argument, by the way. In fact, it seems rather amateurish, but I wouldn't blame that on Jobs' hype...
You can have hyperbole at the keynote and have conservative SEC filings at the same time.
The keynote will say that this is the best thing since sliced bread. The SEC filing will say that this same thing can fail at any time. No contradictions what-so-ever.
iphone enterprise is the big buzz here. i feel the apps store will put a HUGE push to consumers as well, they are also talking about that mlb app (if they can do this for baseball, wow what they can do for......)
i can see me buying at least 4-5 apps ASAP, gps turn by turn, to do outline, voice dialing, imaging apps galore, and a few games. so i think the estimates are way low, how many apps does a treo avg user have, what about BB or MS moble?
we are seeing history being made, apple will soon dominate the moble "desk top"
There's going to be 61.6 million iPhone users by this time next year? Yeah, right.
This seems reasonable enough. However, so far we've got early-adopters, trailblazers buying the iPhone. Once the user base expands well beyond that, you could well see a far greater proportion of users unwilling to spend further; who are happy with the iPhone as it is and don't need any additional functionality, or don't think the additional functionality is worth whatever people might charge for it.
Is this AI's mistake or Munster's? Because that's an average of $5 an app, not $10.
Profit? Er, no. How can a financial analyst be so f*cking clueless? That's $233 revenue for Apple (Apple take 30% of the app fee for themselves, the rest goes to the app maker).
So, he seems to have forgotten about store running costs and credit card fees. Idiot.
Hmm, either AI's not quoting him correctly, or he can't do basic maths.
Because 30% of $777 million is $233 million, which he said is "profit". If he's assuming a 60% operating margin, he should have said $233 million revenue and $140 million profit.
try looking at the chart - he's not forgetting the expenses. Just because AppleInsider may not have been as clear as they could have in a few places doesn't mean Munster got it wrong.
apps will drive this thing, of all the people with the iphone buzz (enterprise) at my corp they can't wait till they can see the enterprise based apps. one IT big wig, said "look at all the stuff on the palm, treo we can get, if apple can get that kind of base AND we can make our own inhouse apps....ITS A BIG GO" IT may not be chomping at the bit, but all the execs are, and why" because it's not just email they need they want web apps, web based processes, and all agree iphone is best at this. it's also a security issue, we are considering for security reasons to have "inhouse" based apps (google like spreadsheets, etc) so execs don't have to carry the "sensitive" info on their soon to be lost or stolen BB's.
iphone enterprise is the big buzz here. i feel the apps store will put a HUGE push to consumers as well, they are also talking about that mlb app (if they can do this for baseball, wow what they can do for......)
i can see me buying at least 4-5 apps ASAP, gps turn by turn, to do outline, voice dialing, imaging apps galore, and a few games. so i think the estimates are way low, how many apps does a treo avg user have, what about BB or MS moble?
we are seeing history being made, apple will soon dominate the moble "desk top"
I agree. People drastically underestimate the target market of the iPhone, execs spend a ton of money on useless apps just because they love gadgets & can afford to buy them.
I also think people dramatically underestimate the game potential. It isn't just rolling the cost of a phone with an iPod, also devices like the Nintendo_DS & the Playstation portable. It's a do everything device that actually is able to pretty much do everything & that will sell like hotcakes.
I also think people underestimate the iPod touch, I see it on the verge of exploding too. There will be a lot of people who used palm type devices (no phone capability) who will jump on the Touch instead of the iPhone.
You can have hyperbole at the keynote and have conservative SEC filings at the same time.
The keynote will say that this is the best thing since sliced bread. The SEC filing will say that this same thing can fail at any time. No contradictions what-so-ever.
True, but different. When Jobs goes out of his way to make actual predictions (what Munster appears to be basing his "neutral" hypothesis on) he tends to be conservative. There is no doubt that they can go overboard in hype (Apple TV is the next big thing / These processors are 4X as fast) but I have found the actual sales predictions to be conservative in the keynotes as well as the SEC filings. Of course, conservative in hindsight. Apple's claim of 10 million iPhones in 08 was seen by some to be outrageous at the time...
Apple's claim of 10 million iPhones in 08 was seen by some to be outrageous at the time...
It's a moving target, isn't it.
Claims of 10 million iphones at $600 is outrageous. 10 million iphoes at $200 is entirely a different matter.
It's a moving target, isn't it.
Claims of 10 million iphones at $600 is outrageous. 10 million iphoes at $200 is entirely a different matter.
The target is still there, it is the gun that is moving
Still, if they had only increased the countries available and added 3G and GPS and Apps Store I suspect they could have hit 10 million easy--even without the latest "price drop."
True, but different. When Jobs goes out of his way to make actual predictions (what Munster appears to be basing his "neutral" hypothesis on) he tends to be conservative. There is no doubt that they can go overboard in hype (Apple TV is the next big thing / These processors are 4X as fast) but I have found the actual sales predictions to be conservative in the keynotes as well as the SEC filings. Of course, conservative in hindsight. Apple's claim of 10 million iPhones in 08 was seen by some to be outrageous at the time...
With the possibility of shareholder lawsuits always present, CEO's always have to
be cautious when making specific predictions. I don't think Jobs was exaggerating
too much.
nevermind
Yeah, good album.