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The credit crunch grabbed the mainstream headlines, but 2008 brought us an equally fascinating display of market mechanics: Apple launched the App Store on the iPhone and the price of applications crashed.
In the six months of its operation, more than 10,000 applications have been launched. Every day about 180 new applications appear in the store. 70% of them are paid applications, and most of them costs 99 cents. Here is a chart from Charles Teague:
The low price of applications frustrate developers.
Be careful what you wish for
It is perhaps ironic that Apple never intended to have neither an App Store nor any application developers for the iPhone. iPhone Apps has come about as a result of pressure from developers. When the iPhone was announced, Steve Jobs clearly stated that the iPhone was a gadget, and no one could put applications on to it. Developers would have nothing of it and started jailbreaking what they saw as a very nice application platform. The developers raised such a stink that Apple decided to give the developers what they wanted: Tools, distribution and billing.
Since then, application developers has been hard at work creating useful applications, only to realize that the only way to sell anything on the App Store was to lower the price to $0.99. It seems like no matter how useful software you make, people value it at $0.99.
Mental model
There is a “mental model issue” at work here. Developers see the iPhone as a computing platform because it runs a proper OX, has developer tools etc. Most people don't see their iPhone as a computing platform, the see it as a fancy gadget. They don't expect to use it for typical computing tasks like word processing. They buy a laptop for that. People are ok with paying what they see as a reasonable price for an office suite for their PC. Say, $150 for a word processor, a spreadsheet and some extra apps. No problem. Millions of people buy a copy of MS Office every year.
Ask them if they are ok with paying $150 for MS Office for their phone and they say no. OK, but if the price was really low… say $50? That’s only 30% of the PC price, a fantastic bargain? No? $25? $15? No? When you cut 90% off the price and people are still not interested, you know you have a problem.
Do you really take the office with you?
An office suite is of course an extreme example, but its meant to prove a point. Almost no one will buy a word processor and a spreadsheet for their phone - at any price. But a laptop without a word processor and a spreadsheet is unthinkable. Office suites have been available for mobile phones for years, and they sell in very small volumes. Office tools for phones are not going to produce a new Microsoft Corp. Neither is any other sort of productivity application.
People are willing to pay for productivity features at the point of purchasing the phone, but not thereafter. They are willing to pay a premium for a phone with nice email, maps, music player, etc. while in the store. But they will not pay for the same features as downloadable applications when they come home. Maybe they will in the future, but not today.
Entertainment
On the other hand people seem more than willing to pay $0.99 to download an application that provides a little bit of amusement or entertainment value. I believe the current best-seller is an application that makes rude body noises. (Now you know what the iPhone demographic “31 year old affluent urban males” are into. In case you ever wondered...)
If you are a developer hoping to hit it rich, maybe you should stop developing that incredibly useful organizer application and get to work on the next iFart app. iOink perhaps?
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