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App Story

The App Store is almost 9 years old. In that time it has generated about $100 billion in revenues, of which about $70 billion has been passed on to developers and $30 billion was kept by Apple. It’s very likely that running the App Store for 9 years did not cost $30 billion so, if it were an independent “business unit” it would probably have been and still be quite profitable.

But Apple does not run “business units” with separate Profit and Loss statements. The App Store is a part of Services which is an amalgamation of non-hardware sources of revenues but that does not mean it’s a business. The purpose of Services isn’t to turn a profit or define its value through some metric of financial performance.

The purpose of Services is to make the experience for the Apple user better. The combination of good experiences allows Apple to be perceived as a valuable brand and that allows it to obtain consistently above-average profitability through pricing power. I like to emphasize that the iPhone at over $600 in average price is more than twice the average price of all the other smartphones and captures over 90% of all available profits.

This is something that remains after a decade and indeed the price is rising in the face of overall price erosion, all without a decrease in volumes. The sustainability of this exceptionalism is due to no one single thing. It’s due to the persistence across all the things Apple does: product, stores, software and services and many other details too numerous to count.

The result is a large and expanding base of satisfied customers and a large and expanding base of partners both in hardware and software and services. The WWDC event this year showed how the ecosystem of Apple is booming with over 3 million new developers and Keynote screenfuls of partnerships. All this makes for a complex picture but it’s a real picture.

The latest numbers on Services try to tell this story: 180 billion App downloads from 500 million App store weekly visitors. The download rate is accelerating as shown in the following graph:

The revenue or payment rates can also be shown as accelerating though at a different rate. In both cases, the story of apps is not yet over, regardless of commentary to the contrary. Much of this growth comes from new markets like China and as India joins the iOS world, there is yet more opportunity emerging.

This enables part of the story of Services which can be tracked with several other metrics: reported revenues, iCloud accounts, active devices, and iTunes accounts are highly correlated.

The patterns after a decade are remarkably consistent. One would have thought that with mobile saturation in advanced markets, the content story would be told through horizontal lines. What we still see is the same slopes we’ve seen since the earliest days.

But the biggest story at WWDC was the re-design of the App Store as a curated content market. The changes are profound: discovery, curation and the surfacing of content have been revamped. It’s hard to predict the implications of this but one of the indications of direction was the separation of “Games” from “Apps”. This is a jarring idea since if all Apps are content, what makes Games different from other Apps? Is this a genre elevated to a new medium?

I can’t yet get a sense of where this is heading, if anywhere, but the remarkable story of Apps is that it’s still an ongoing story. We may be on chapter 2 and we can’t predict how many chapters remain.

Keep an eye on Apps and Services and developers. They are not lagging indicators of success for Apple. They are very much leading.

  • Luis Alejandro Masanti

    Thanks God you’re still alive!
    (A little exaggeration from my part… Glad to read you again!)

    I think that the separation of Games and App —although Games are Apps— is good in the sense that being Games a great part of the apps world it distorts the full store.
    With the separation, the Apps parts goes back to a more equally distributed place.

    But I still waiting for some kind of ‘search with refinements’… to be able to ask for some category and then search only inside that category and then inside the reduced set… and so on.

    Once again, glad to read you again!

    • Sacto_Joe

      I agree that separating Games from Apps is a positive from a search POV. But what about educational games, for example? Not sure it’s as clean a demarcation as all that….

  • Luciano

    Agree with the overall article, but that linear regression on the developers payments rate is a bit misleading. The three latest data points show exactly the same figure ($20 billion/year), so one can argue that the growth is not there anymore.

    • Simon_Hibbs

      I don’t know why there are three dots at the end, not one. Did the frequency of sampling just triple and also happen to gave the same numbers? It looks like an anomaly in the data set TBH. If it is true though, another question for me is how come developer revenue jumped so dramatically in early 2016?

  • Fran_Kostella

    Speaking as a developer, I don’t find this picture comforting in any way. Apple makes tons of money, the devices are fantastic, the underlying tech is high quality and forward thinking, but the developer business facing side is not so great.

    After nine years and billions made from apps and don’t forget the annual $99+ fee, the investment in developers just isn’t there. The App Store is essentially the same as it was when I joined in 2010 with just a few slight tweaks here and there. Apple has strict control over what we can do but the quality of support is inconsistent, the toolset gets modest upgrades and sometimes regresses, and, worst of all, we have limited interaction ability with our customers.

    For comparison, look at what Amazon allows you to do if you are a third party seller on their site. You can actually deal with problems if they arise and email your customers, respond to reviews, and generally work to form relationships. In nine years Apple added the ability to add videos, and recently added limited interaction with customer reviews. And search is horrible. Yes, it is a difficult problem, but still, can’t *something* be attempted? Certainly, money isn’t the problem? The problem seems worse than ever to me.

    And adding 3 million new developers is not a good thing to me. That means potentially 20% more junk apps adding noise to searches for my app. The root problem with the App Store is that it is filled with junk apps, mostly free or which become free after a few weeks of zero sales. The only benefit is that Apple can make announcements about how many apps they have in the store. It is *not* a good thing any more that having a restaurant menu with 5000 dishes listed. Trying to find something you like is impossible and you end up picking whatever is close enough. A few hundred apps get prominent listing on the store and a few sites, but it is mostly a mountain of garbage apps. And a lot of this might be traced to the emphasis on “free” apps, which benefits Apple a great deal, but makes it hard to compete against the “free app mindset” with new quality apps.

    The developers I “grew up with” learning how to build great apps have mostly already left the store and are leaving iOS as the main platform they work on. I can say we all love the platform and would prefer to write for iOS over anything else, but it is just no longer viable as a place professional indy developers can make a living. All of my peer group has moved on to only doing apps as a secondary interface to some other product or as part of a marketing project. All of the local iOS shops now either do games or build apps for brands that want a mobile presence.

    So, this might all be good for Apple, but it has turned into a place where big budget companies take the bulk of the profit and there are millions of amateurs making nothing. There is a small slice of developers between those two, but from here it looks like it is shrinking. That seems to be a problem to me. I wish that the garbage apps would get cleaned out quickly and that Apple would discourage the idea that all apps must be free.

    • Fran_Kostella

      And one thing I didn’t mention about the “free app mindset” is that this does not seem to be an accident, but seems to be deliberate.

      As far back as I can recall, developers have wanted free trials. This gives the user time to do a real evaluation for free, but kills the app if you don’t pay after some period of time. Instead, we get IAP, which is a real PITA to implement and support. In any case, indy developers really depend on free trials in the open marketplace. But after nine years and billions made on app sales and developer fees this still isn’t available. I believe it is not technically hard to do but is deliberate to goose the numbers. After all, a free trail that is rejected is not an app sale, but a free app with no IAP purchase does count. Well, I don’t really know, but app trials would draw some indy develops back to the store.

      Personally, my plan is to rewrite my existing apps as web apps with free trials and provide an iOS interface for free but needing a login to work. I’ve had users complain about my greed for wanting payment when they paid Apple $700 for a phone and they “know” that Apple pays me to make apps! So getting out of the App Store seems the right solution.

      • evidence

        “In any case, indy developers really depend on free trials in the open marketplace.”

        Where’s the evidence? The only dataset I know of shows that free trials for video games decreases sales, rather than increases them. You’re forgetting that it cuts both ways, and that there’s plenty of people who pay an upfront cost for an app that they wouldn’t have if they had tried a trial version.

      • Fran_Kostella

        You are right to point out that games and everything else are different. I’m speaking as a non-game developer. I didn’t say anything about games exclusively. I should follow Apple’s lead here and call everything that is a game “Games” and everything that is not a game, “Apps”.

        But there’s no data evidence for your implied assertion that the losses are the same as the gains. I base my claims (as I pointed out) on anecdotal evidence of my peers and the blogs written by indy developers. None of the non-game indys claim that free trials hurt them. The sparse data makes it hard to judge any of these claims.

      • Fran_Kostella

        Well, games-only info is an unmeasured part of the whole story, and you don’t specify the source so it is hard to judge this. At least the 2015 report from Developer Economics is based on surveying iOS developers, who are the people I am talking about. Your example can’t be about iOS since there are no free trials in iOS. So? I dunno, is that useful to iOS developers? Not yet.

        In any case, I’m speaking as a non-game developer and I didn’t say anything about games exclusively, so this doesn’t resolve or change much. I should follow Apple’s lead here and call everything that is a game “Games” and everything that is not a game, “Apps”. In that mode, I write “Apps” exclusively.

        But there’s also no data evidence for your implied assertion that the losses offset the gains. I base my claims (as I pointed out) on anecdotal evidence of my peers and the blogs written by indy developers aside from the report I mention. None of the non-game indys claim that free trials hurt them. The sparse data makes it hard to judge any of these claims. Apple has all of this data, but sees no advantage to release anything but the most coarse data, which happens to advance their narrative.

      • evidence

        Your comment (rudely) shows that you didn’t carefully read mine, and you’ve inferred an assertion I never made. If you want to try to read it again and not make wild assumptions then I’ll be happy to engage.

    • I agree. The problem is the free pricing. If Apple set a $5.00 minimum price the market would soon realize the bottom priced apps have little value.

    • Fran_Kostella
  • Arjun Saroya

    Horace, I agree with your general sentiment that the amazing story of Apple isn’t over, but how do you rationalize Services being a leading indicator, when it’s inextricably tide to number of devices in use? The brand is an undeniable moat, but with a 2 year average refresh cycle on the iPhone ( no sourcw, just a guess), Services can take a sharp decline if the growth and absolute install base of hardware declines, and is by definition therefore a lagging indicator. Unless you were alluding to something else that I didn’t pick up on.
    I think the next chapters of Apple are written on all of the dollars, euros and yuan in its vaults. That is to say, they have a lot of chances at bat to create the next world changing product (or service), with a structural advantage in their corporate DNA of creative destruction, lots of money in the bank, and a brand that can withstand a lot of small experiments.

    • Sacto_Joe

      You actually refute your own point, Arjun. It is precisely because of Apple’s phenomenal retention rate that services is destined to grow. It’s true that the percentage of customer growth relative to the existing services revenue will decrease, because Apple’s growth in users appears to be linear. But growth is growth, even if it decreases from a percentage point of view. Besides, at least at this point, Apple is still growing the types of services it offers those very loyal, and generally well off, customers.

      • Arjun Saroya

        Hey Joe, I was more specifically trying to clarify how Services is a leading indicator, because it seems that by definition Apple services hinge on hardware. For Services to be a leading indicator it would need to break away from hardware in terms of absolute net income growth and contribution. That would essentially mean that for every dollar of hardware net income, we would need to see 1.1x, 1.2x, 1.3x… of net income coming from Services. Essentially we would have to see people spend a considerable percentage of the hardware cost of the phone over the two years they own the phone, and then repeat that, increasingly, year over year till the net income lines of those two profit streams diverged. That seems potentially possible with things like AI, AR and the dawn of the new user interfaces in general, but I was hoping to see if that was where Horace was headed with his reasoning.
        Cheers!
        (long Apple)

      • Simon_Hibbs

        Apple services revenue is increasing faster that account numbers. That means services per user are getting more valuable over time. Therefore services are increasing user stickiness and lock-in. If users are becoming more sticky, that indicates they are going to be more likely to buy new hardware and stay on the platform in the future. Also other customers are more likely to be attracted to the platform by the valuable services even if other kinds of platform attractiveness stay constant.

      • Therefore services are increasing user stickiness and lock-in.

        I’m still in the customer experience camp as the primary driver for retention, and for all of Apple’s hardware and services revenue.

      • Walt French

        As *I* read Horace’s analysis, services show Apple creating depth with users, building out the opportunity for increased involvement/value PER USER.

        Look at the WWDC emphasis on AR, for example: there are APIs for programmers to implement apps on EXISTING hardware, creating a whole new wrinkle in the apps market, or maybe an entirely new market. And when devs push the envelope on AR, why, there’ll be a demand for even more powerful iPhones.

        Or consider music. The HomePod would be a non-starter without it, but it’s built to leverage the huge number of people who use iTunes and Apple Music…–>services<–.

        These strike me as symmetrical synergies, except that the huge growth phase for iPhones—the peak adoption growth rate—has already occurred while there are all sorts of opportunities in services, which will continue to fuel hardware sales. New hardware breakthroughs still TBA.

      • berult

        Apple provides for, and caters foremost to a self-building, self-fulfilling continuum. It’s a real-numbers’ odyssey, with somewhat of an imaginary-numbers’ trajectory. Life…the sustainably evolving variety. berult.

      • hannahjs

        Exciting prefixes! Self-this and that, real- and imaginary- this that and the other. Is it only English, the princess of morphologies, that can contort meanings by tacking on front? Lewis Carroll strewed plenty of confusion without a hyphen.

  • hannahjs

    Number of developers and payout to developers are leading indicators at any tech company. The number of accounts, active devices, app downloads, and customer satisfaction are all leading indicators. Horace has shown how they are strongly correlated here so yes, Apple Services in the aggregate can be a useful leading indicator.

    The essential distinction between apps and games is a newer, intriguing question that has not really been raised until now. Following WWDC17, analysts tended to report Apple’s cleaving of them as just a feature of interface redesign – but the language used by the presenters clearly indicated a deliberate semantic separation of the two, and not just for the purpose of convenience in ranking or discovery. There’s a whiff of future in the renaming.