Why apps matter
One of the keys to strategic success in high-tech is to anticipate how technological innovation, customer demand and the business ecosystem will co-evolve. When looking at high-tech, we tend to focus on significant shifts in value creation and value capture, as these are the source of the key threats and opportunities for our clients.
Much of our work recently has been focused on smartphones and on applications, because of our belief that a significant shift is underway in which smartphones and their related services will both represent a very large opportunity, and have a major impact on adjacent arenas as convergence plays out:
- smartphones will first become the majority of mobile phone sales by value, then by volume, and soon thereafter represent most of the installed base and the majority of the margin opportunity
- this shift is already reflected in the disproportionate share that Apple and RIM are capturing of the value created in mobile phones
- the shift to smartphones is changing user’s behaviours and economics in some very significant ways
Deutsche Bank's analysis of value captured by mobile phone vendors
We believe that a key part of this shift from both and economic and behavioral perspective is the adoption and usage of applications on smartphones.
As a result, the recent analysis by AdMob, reported by for example GigaOM is particularly interesting:
If I were to tell you that Apple’s app economy was worth more than
$2.5$2.4 billion a year, you would laugh hysterically, shake your head and walk out of the room, yes? Surf on over to some other web site? But here I am telling you exactly that! According to mobile advertising startup AdMob, there are some $200 million worth of applications sold in Apple’s iPhone store every month, or about $2.4 billion a year (their emphasis).
There are two key numbers upon which this estimate is based:
- what % of (all) users download one or more paid applications each month
- how much does each user spend on average
% of users who download paid applications
For the iPhone ecosystem, AdMob estimates on the basis of its survey that it’s about 45%.
Average spend per user on paid applications
Put these two together, and if AdMob’s numbers are right, the average spend per user who buys paid apps is somewhere between ~$7 and ~$12. They provide an estimate on page 6 for the iPhone that it’s ~$9.50.
For the iPhone ecosystem, with about 45% buying paid apps, that implies average spending per month of ~$3 to ~$5 on applications; call it $4.
With about 45 million users in the ecosystem, that’s $180 million per month, of which Apple is taking ~30%, or ~$50 million per month.
Apple has said in its recent response to the FCC that there are ~40 people reviewing applications; on this basis that’s >$1 million per reviewer per month.
The key question here is sample bias: how representative is AdMob’s sample set?
Respondents were sourced through mobile ads on AdMob’s global network
Mobile ads linking to the mobile survey were shown across AdMob’s iPhone and Android networks of over 7,000 mobile Web sites and 3,000 iPhone and Android apps
This may bias the sample towards more active users. We are digging deeper into the numbers, and will report what we find. In particular, we’re focusing on how these estimates from AdMob compare to hard numbers that can be externally verified.
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