Gold rush! Big money seen for iPhone, smartphone app developers

Smartphone-apps revenue expected to jump to $4.2 billion by 2013

A gold rush for developers who build applications for the iPhone and other smartphones is in the works, with U.S. revenues from smartphone apps expected to increase by a factor of more than 10 through 2013, to $4.2 billion.

That estimate, from Yankee Group Research Inc. in Boston, was calculated using the following factors: growth in smartphone unit sales, which Yankee Group expects to quadruple between now and 2013; an expected increase in the number of smartphone applications, and a projected jump in the average price of a single app from $1.95 today to $2.37. Yankee Group expects the number of smartphones sold to grow from 40 million in 2009 to 160 million in 2013.

If developers want to cash in on the potential gold mine, Yankee Group recommends that they write applications that are different from the ones that most of their fellow developers are building.

That means, for example, that developers of iPhone apps should focus not on games but on business tools -- because there aren't many of those for iPhones. However, developers who really want to create new games should consider writing apps for the BlackBerry, because there are already plenty of office and business tools for that platform.

"BlackBerry already has so much software for business, so there's a real opportunity for consumer apps," said Carl Howe, an analyst at Yankee Group, in an interview.

In contrast, Apple Inc. lists 75,000 applications in its App Store, and most are consumer-focused, Howe noted. "If you are trying to hit the top 25 paid apps on App Store with the next cool game, there are probably 1,000 developers out there that want to also. So I'd say to go where everybody else isn't."

Yankee Group based its analysis of purchased applications on a survey of 1,200 consumers who own smartphones. Howe said he was most surprised by the finding that the average user has downloaded 20 applications. Games overwhelmingly led the list of downloaded apps, representing 73% of the total. Apps for search came in second, and social networking apps were third. After that, users said they picked applications to help with specific interests, such as bird watching, followed by banking apps, which were fifth.

"I'm surprised by the sheer number of apps now being downloaded," Howe said.

Only 18% of the applications from all of the various app store sites were paid for, but Howe said there is still a healthy revenue stream from that group. In all of 2009, Yankee estimates there will be $343 million in U.S. revenue from applications for smartphones sold through online application stores. And that number is expected to exceed $1 billion in 2011 and reach more than $4.2 billion in 2013.

About $2.9 billion of that $4.2 billion will go into the hands of developers, while $1.3 billion will go to the companies running the app stores, such as Apple; Research in Motion Ltd., which runs BlackBerry App World; Google Inc., which runs the Android App Market; and Nokia Corp., whose online store is called Ovi.

Yankee didn't count revenues for applications sold to iPod Touch users, because the media player is not considered a smartphone.

Free applications dominate the number of downloads from application stores, but those free apps often entice buyers to move up to a deluxe version for a fee. In that sense, application marketers are using the free apps to help generate revenue. The majority of paid apps cost 99 cents to $2.99, with a few in the range of $4.99 to $9.99. In general, the most that consumers are willing to spend on an application is under $3, Howe said.

While it might be advantageous for a game developer to find platforms other than the iPhone, it won't be easy. The various smartphone application stores and platforms are "very different environments to work for, including everything from how they split revenue, the development language used, what marketing support you get and even how much investor support will be offered," Howe said.

In addition, Howe said, it's not easy for a small developer shop that has spent years building applications in, say, the Java programming language to suddenly start building iPhone apps, which often involves developing in Objective-C. "You pretty much have to start afresh," he said.

Android and BlackBerry apps are often built using Java, while Palm Inc.'s platform is based on its WebOS mobile operating system, which is Web-centric -- a factor that could help Palm gain more smartphone applications because there are so many Web developers, Howe said.

"Since WebOS is Web-centric, that will help Palm with its app supply," Howe added. "The number of C++ developers is probably half a million, while there are millions of Web developers, some of whom could build smartphone apps. It's hard to walk down the hall of a high school without knocking over a few Web developers who have used HTML."

In the U.S., Howe estimated there are 1 million to 3 million software developers who could potentially write smartphone apps in coming years.

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