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Apple's App Store vital to iPhone success, say analysts

'Well-oiled' online mart needed to make the iPhone a platform, not just a phone

June 12, 2008 12:00 PM ET

Computerworld - Nearly overlooked in the hoopla over its new 3G smart phone this week has been Apple Inc.'s creation of an iPhone development platform, analysts said today.

The App Store, the online mart scheduled to go live July 11, is the best example of Apple's newfound platform religion, said analysts Carl Howe of the Yankee Group Research Inc. and Michael McGuire of Gartner Inc.

"I think there is that significant potential for App Store to be for the iPhone what iTunes is for the iPod," said McGuire. "One thing Apple knows how to do is sell bits," he added, referring to the success of iTunes, Apple's online music store. "iTunes is seamless and frictionless, and I think that can be duplicated with the App Store."

If so, Apple will have a hit on its hands, a totally new market for software created on the iPhone platform that could pump millions in the company's coffers next year.

Howe also pointed to the App Store as a sign of Apple's emphasis. "This shows that the iPhone is not designed as a garden-variety consumer electronics product, but as a platform. In a platform, the add-on pieces can turn out to be as valuable, or even more valuable than, the original device."

CEO Steve Jobs spent about a third of Monday's Worldwide Developers Conference (WWDC) keynote address talking up the iPhone as platform, noted Howe -- another indicator of the importance Apple puts on the concept. "If there's one thing we know about Jobs' keynotes is that he doesn't waste time on things that are unimportant to users," said Howe.

Other metrics, said both Howe and McGuire, include the number of WWDC sessions dedicated to the iPhone, and the fact that the conference was sold out for the first time ever. "Tickets to WWDC run about $1,600, said Howe, so you can say that about a third of the conference's revenues can be attributed to the iPhone." Just under a third of all the sessions at this year's WWDC were aimed at iPhone developers.

Apple introduced the App Store in March, when it unveiled the iPhone software developer's kit. As described then, and outlined in greater detail on Monday by Jobs and other Apple executives, the App Store will act as an iTunes-like outlet for iPhone applications written by third-party developers.

Developers set the price for their wares -- or if they want, tag them as free -- and receive 70% of the revenues; Apple keeps 30%, but provides all the marketing muscle and the bandwidth.

IPhone owners will be able to reach the App Store directly via either a cellular data connection or a Wi-Fi hot spot, pay for (if necessary) and download an application. In addition, users will be able to reach the App Store from iTunes on a Mac or PC; the computer will later push the downloaded applications to docked iPhones.

Some Wall Street analysts have been very bullish about the App Store's potential for adding to Apple's bottom line. Gene Munster of Piper Jaffray & Co., for example, has said the App Store could rake in as much as $1.2 billion, giving a boost of $363 million to Apple's revenues in 2009. Less aggressive projections by Munster range from $416 million to $777 million in total App Store revenues, or $125 million to $233 million in Apple's pockets.

"I think the App Store has the potential to get to that middle number [$777 in revenues]," said McGuire, "but it's not all about the App Store numbers." Rather, he said, it's as much about the value that the App Store provides iPhone owners, or even more specifically, what iPhone owners perceive as its value.

Howe, meanwhile, compared Munster's most aggressive projection to what Apple currently makes on sales of nonoperating system software. "Apple has a $1.5 billion software business, which is about 4% of its revenues. App Store lets them add to that number without actually developing the software themselves."

If Apple can, with the App Store's help, push software sales to the 5% mark when it's a $50 billion company, it'll be happy, he added.

"The App Store may not be crucial to the success of the iPhone," Howe said. "I think a better word there is 'important.' But it is crucial to the success of the iPhone as a platform."

McGuire agreed, but put the App Store's importance to the iPhone-as-platform idea in a different light. "Developers are asking themselves, 'Which do I develop for? Android, Nokia, iPhone?' But if Apple is able to create the well-oiled App Store, that may be one of those decision points for developers."

Read more about App Development in Computerworld's App Development Topic Center.



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