Endeavour Partners

So, after all the discussion last week, how big is the App Store ecosystem?

Our analysis suggests that total App Store ecosystem revenues will be between $700 million and $1 billion for 2009.  This estimate breaks down as follows (** see note for more details):

2.7 billion downloads * ~15% of downloads are paid apps * $1.75-$2.50 per paid app = $700 million – $1 billion

But, as Digital Clockworks points out, in all the debate about numbers and methodology some of the most interesting and important elements of the story are being missed.  First, this is a big, rapidly growing market.  The key difference between our estimate and some of the lower numbers we’ve seen is that we’ve accounted for continued growth over the second half of 2009.  The second half of the year will generate 50% more revenues than the first half.  Also, we see this growth continuing.  Over the next 12-18 months the iTunes App Store will become a multibillion dollar annual business.

More importantly, however, the iPhone and the App Store have revealed a new paradigm for how mobile users will interact with their devices and use the Internet.  The App Store represents one more example of how “over the top” approaches over IP networks are beating out purpose-built, vertically-integrated network businesses.

Most of us wouldn’t dream of paying for a customized Internet experience on a tailor-made device from our broadband service provider (*** see note).  But that is the way we used to buy telephone service, and it continues to be the way we do things for mobile and video services.  Over time, all of these businesses will follow a similar pattern, breaking down into their component parts so that the best adapted players win in each piece of the business.  The only questions are:  “Who are the best adapted?” and “How long will it take?”

The App Store represents a major 'over the top' incursion in mobile data. How long will it take for 'over the top' models to eat into the mobile voice market and the video market?

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Notes:

** Total downloads for 2009 come from Endeavour Partners’ analysis and forecast of App Store downloads, tracking Apple announcements; ratio of paid vs. free apps comes from Pinch Media but is consistent across multiple sources; average price per paid download has been reported as low as $1.67 and as high as $2.87, so we used a range

*** We actually used to buy Internet services this way as well:  AOL, Prodigy, NetZero, and PeoplePC (which included a PC in the bargain!); there is a segment of users who appear to be heading back in this direction (see the success of Comcast.net or the recent push for connected netbooks with service from AT&T or Verizon)